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7/30/2019 DOJ Motion of Facts and Law
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UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
__________________________________________
)UNITED STATES OF AMERICA, )
)
Plaintiff, )
)v. ) Civil Action No. 12-cv-2826 (DLC)
)
APPLE, INC., et al., ))
Defendants. )
__________________________________________)
__________________________________________
)
THE STATE OF TEXAS; )THE STATE OF CONNECTICUT; et al )
)
Plaintiffs, ))
v. ) Civil Action No. 12-cv-03394 (DLC)
)PENGUIN GROUP (USA) INC. et al, )
)
Defendants. ) __________________________________________)
PLAINTIFFS’ PROPOSED FINDINGS OF FACT
AND CONCLUSIONS OF LAW
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UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
__________________________________________
)UNITED STATES OF AMERICA, ))
Plaintiff, ))
v. ) Civil Action No. 12-CV-2826 (DLC))
APPLE, INC., et al., ))
Defendants. ) __________________________________________)
__________________________________________ )
THE STATE OF TEXAS; )THE STATE OF CONNECTICUT; et al., )
)Plaintiffs, )
)v. ) Civil Action No. 12-cv-03394 (DLC)
)PENGUIN GROUP (USA) INC. et al., )
)Defendants. )
__________________________________________)
PLAINTIFFS’ PROPOSED FINDINGS OF FACT
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TABLE OF CONTENTSI. INTRODUCTION .............................................................................................................. 1
II.
DEFENDANTS .................................................................................................................. 4
A. Litigating Defendants........................................................................................... 4 B. Settled Defendants ............................................................................................... 4
III. BACKGROUND ................................................................................................................ 5
A. The Publishing Industry ....................................................................................... 5 B. Amazon Ushered in the Modern E-Book Era in 2007 with the Kindle Device
and Low E-Book Prices ....................................................................................... 5
C. Apple Never Wanted to Price Compete Against Amazon ................................... 7 D. Publisher Defendants Hated Amazon’s $9.99 Pricing ......................................... 8
E. E-Books Would Have Been Available on the iPad No Matter What………….10
IV. PUBLISHER DEFENDANTS SOUGHT TO RAISE RETAIL E-BOOK PRICES........ 11 A. The Publishing Industry Is Well-Suited to Coordinated Pricing and Interaction
........................................................................................................................... 11 B. Publisher Defendants Shared Competitively Sensitive Information with Each
Other .................................................................................................................. 12 C. Early Plans to Force Amazon to Raise Its Prices Were Abandoned for Lack of
Industry Support ................................................................................................ 13 D. Groups of Publisher Defendants Discussed Raising Retail E-Book Prices in the
Context of Potential Joint Venture Conversations ............................................. 14 E. Publisher Defendants Used Coordinated Windowing as a Tool to Try to Force
Amazon to Raise Its Retail E-Book Prices ........................................................ 16 1. Single-Title Windowing .................................................................... 16 2. Systematic Windowing ..................................................................... 17
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3. The Threat of Windowing, by Itself, Was Unlikely to MoveAmazon’s Prices Due to Insufficient Publisher Participation andRisks Inherent in the Strategy ........................................................... 20
V. IN RECOGNITION OF THEIR SHARED GOALS, APPLE AND PUBLISHER DEFENDANTS AGREED TO INCREASE THE PRICE OF E-BOOKS TOCONSUMERS AND RESTRAIN RETAIL E-BOOK PRICE COMPETITION ............ 20
A. Apple Began Reaching Out to Publishers on December 8, 2009 ...................... 22 B. Some Publisher Defendants Considered Agency Prior to Initial Apple Meetings
........................................................................................................................... 23 C. Apple Held Initial Meetings with Big Six Publishers on December 15 and 16,
2009 ................................................................................................................... 24 D. Apple Embraced Agency and Higher E-Book Prices Following Its Initial
Meetings with Publisher Defendants ................................................................. 26 E. Publisher Defendants Communicated Directly with One Another During Apple
Negotiations ....................................................................................................... 27 VI. EDDY CUE CONVEYED INDUSTRY-WIDE AGENCY MODEL PROPOSAL IN
DECEMBER 21, 2009 CONVERSATIONS WITH THE CEOS OF SIMON &SCHUSTER, MACMILLAN, AND RANDOM HOUSE ................................................ 30
VII. APPLE’S SUBSTANTIVELY IDENTICAL E-MAILS TO PUBLISHER
DEFENDANTS ON JANUARY 4 AND 5, 2010 SET FORTH THE PRINCIPLES OFTHE CONSPIRACY AMONG APPLE AND PUBLISHER DEFENDANTS ............... 32
VIII. APPLE’S FOLLOW-UP COMMUNICATIONS WITH THE PUBLISHERS WERE
DESIGNED TO FACILITATE COLLECTIVE PUBLISHER ACTION ........................ 35
IX. APPLE’S AGENCY AGREEMENTS FACILITATED AN ILLEGAL CONSPIRACYTO RAISE E-BOOK PRICES AND RESTRAIN PRICE COMPETITION BYENSURING THAT PUBLISHER DEFENDANTS WOULD SWITCH THEIR OTHER E-BOOK RETAILERS TO THE AGENCY MODEL ..................................................... 40
A. Apple’s Initial Written Proposal Included a Most Favored Nation Clause as aMechanism to Ensure that Each Publisher Defendant Would Move All of ItsE-Book Retailers to Agency .............................................................................. 40
B. Apple’s Initial Written Proposal Included “Price Caps” That Would Function as
Fixed Prices for Publisher Defendants’ E-books ............................................... 45
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C. Apple Agreed to Higher Price Tiers .................................................................. 46 D. Apple Pushes Publisher Defendants Forward as Amazon Offers Better Deal to
Authors .............................................................................................................. 48
E. In Order to Secure a “Critical Mass” of Publishers for the Conspiracy, AppleAssured Publisher Defendants that Their Competitors Would Join theAgreement .......................................................................................................... 51
F. The Conspiracy Benefited Apple by Allowing Apple to Earn a 30%
Commission Without Needing to Compete Against Amazon on Price ............. 57 X. APPLE’S ASSURANCES OF COMMON ACTION GAVE PUBLISHER
DEFENDANTS THE NECESSARY CONFIDENCE THAT THEY WERE NOTACTING ALONE ............................................................................................................. 59
XI. IN ACCORDANCE WITH THEIR CONSPIRACY WITH APPLE, ALL PUBLISHER
DEFENDANTS PRESENTED AGENCY AGREEMENTS AS AN ULTIMATUM TOAMAZON ......................................................................................................................... 61
XII. SIGNING AN APPLE AGENCY AGREEMENT WOULD HAVE BEEN CONTRARY
TO EACH PUBLISHER DEFENDANT’S ECONOMIC INTERESTS ABSENT THECONSPIRACY ................................................................................................................. 68
XIII. APPLE AND PUBLISHER DEFENDANTS PRESSURED RANDOM HOUSE TO
JOIN THEM IN SIGNING AGENCY AGREEMENTS ................................................. 69
XIV. THE CONSPIRACY AMONG APPLE AND PUBLISHER DEFENDANTSACHIEVED ITS COLLECTIVE GOALS OF RAISING E-BOOK PRICES ANDENDING RETAIL PRICE COMPETITION.................................................................... 72
A. Prevailing Low E-book Prices Would Have Continued But For the Conspiracy
........................................................................................................................... 72 B. Apple and Publisher Defendants Understood the Price Caps in the Apple
Agency Agreements Would Become de facto E-book Prices ........................... 73 C. Average Prices of E-books Increased Soon After Implementation of the Apple
Agency Agreements ........................................................................................... 75 D. The Apple Agency Agreements Harmed Consumers by Preventing Promotional
Competition Among Retailers. .......................................................................... 82 E. Higher Agency Prices Reduced E-book Sales ................................................... 84
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F. Reduced Royalty Payments Harmed Authors.................................................... 86 XV. THERE ARE NO PROCOMPETITIVE JUSTIFICATIONS ATTRIBUTABLE TO THE
APPLE AGENCY AGREEMENTS ................................................................................. 86
A. The Apple Agency Agreements Did Not Promote Competition for Complementary Products Such as E-readers and Tablets ................................. 87 1. Lower Device Prices Are Not Attributable to Agency ..................... 88 2. Improved Device Features Are Not Attributable to Agency ............. 89
B. The Apple Agency Agreements Did Not Promote Competition for E-Reader
Apps ................................................................................................................... 89 1. Features that Preceded the Apple Agency Agreements Cannot
Possibly Have Resulted from Those Agreements ............................. 90 2. Features that Appeared Long After the Apple Agency Agreements
Did Not Result from Those Agreements ........................................... 90 XVI. THE RELEVANT PRODUCT MARKET IS TRADE E-BOOKS AND DEFENDANTS
COLLECTIVELY POSSESS MARKET POWER .......................................................... 91 A. E-books Are Different from Physical Books ..................................................... 92 B. Market Participants Observe Low Substitution from E-books to Physical Books
........................................................................................................................... 92 C. Individual Trade E-book Titles Are Not Separate Markets ............................... 94 D. The Relevant Geographic Market Is the United States ...................................... 94
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I. INTRODUCTION
1. As set forth in the following Proposed Findings of Fact, and accompanying Conclusions
of Law, Defendant Apple, Inc. unlawfully orchestrated and participated in a horizontal price-
fixing agreement among five of the six largest publishers in the United States (“Publisher
Defendants”), including Defendant Penguin Group (USA) Inc., in violation of Section 1 of the
Sherman Act, 15 U.S.C. § 1.
2. The price-fixing conspiracy at issue in this case has its roots in publisher antipathy for
low prices set by retailer Amazon, Inc. for the sale of e-books. Amazon was instrumental in
creating consumer demand for e-books in the United States, both through the development of its
Kindle e-reader and its practice of setting low retail prices for e-books generally and especially
low prices for many of the most popular e-books. For these and other reasons, the sales of
e-books grew significantly in the U.S. over the last several years.
3. As is described in further detail below, the evidence in this case establishes that Publisher
Defendants worked individually and together in an effort to persuade Amazon to raise its prices
to consumers, especially the $9.99 price it set for New York Times bestsellers and other newly
released titles. Those efforts were unsuccessful as of late 2009, when Publisher Defendants
entered into discussions with Apple about Apple’s possible entry into e-book retailing through
the opening of its iBookstore. Publisher Defendants and Apple quickly realized that they shared
the objective of thwarting Amazon’s ability to compete on price. And their remaining goals
were complementary: Publisher Defendants wanted higher retail prices and Apple wanted 30%
margins. So Apple set out to impose a new distribution model on e-books, a so-called agency
model, under which Publisher Defendants could set their higher consumer prices and then hand
over the extra revenues to Apple.
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4. The crux of Apple’s scheme was that Publisher Defendants would move together to strip
retailers of pricing authority and thereafter set retail prices themselves. Apple understood that
Publisher Defendants would agree to this dramatic change in business practices only as a group
and primarily to increase consumer prices. Apple designed the agency model ultimately
reflected in the Apple Agency Agreements; it repeatedly assured Publisher Defendants that other
publishers were on board with its agency model; it acted as a conduit among the publishers to
reassure them that there was a common plan in place; it made plain that not only would Apple be
on the agency model but that the Apple Agency Agreements would allow the publishers to force
other retailers to adopt an equivalent agency model as well (especially Amazon); it negotiated
consistent “price caps” with Publisher Defendants so that retail prices of many categories of e-
books would be not only higher but uniform; and it acted with complete disregard for consumer
interests in low prices and in vigorous price competition.
5. The conspiracy among Apple and Publisher Defendants was remarkably successful.
Over a three-day period in January 2010, the five Publisher Defendants each agreed to all-but
identical Apple Agency Agreements, abandoning the longstanding practice of wholesale
distribution of e-books, and each then promptly took steps to force Amazon to an agency model
as well. Amazon caved to the combined pressures of the five Publisher Defendants, who
threatened to cripple Amazon’s e-book business by withholding their e-books. The results were
exactly what Apple and Publisher Defendants intended. The $9.99 problem at Amazon was
solved, retail prices went up, and Publisher Defendants began setting retail prices at levels
remarkably consistent with the price tiers in the Apple Agency Agreements. Millions of U.S.
e-book readers suffered the consequences.
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6. The following chart demonstrates how e-book prices increased immediately after the first
Publisher Defendants moved Amazon to agency in April 2010 (with Penguin delayed until late
May):
Gilbert Direct Figure 3.
7. The events of late 2009 and early 2010 that led to the seismic shift of the publishing
industry to an agency model for e-books, and the resulting dramatic impact on consumer prices,
were not the result of competitive forces and different firms acting independently of one another.
Rather, as the parties’ documents, admissible deposition testimony, and expected trial testimony
overwhelmingly establish, Apple and Publisher Defendants entered into a “conscious
commitment to a common scheme” aimed at limiting retail price competition for e-books, with
Publisher Defendants achieving higher retail prices and Apple obtaining margins far in excess of
what e-book sellers previously earned. As a result, and as is further set out in these Proposed
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Findings of Fact and accompanying Conclusions of Law, Apple and its co-conspirators violated
Section 1 of the Sherman Act.
II. DEFENDANTS
A. Litigating Defendants
8. Apple, Inc. is a California corporation with its principal place of business at One Infinite
Loop, Cupertino, CA. Apple Inc. Annual Report (Form 10-K), Oct. 31, 2012, available at
http://www.sec.gov/Archives/edgar/data/320193/000119312512444068/d411355d10k.htm.
9. Penguin Group (USA) Inc. is a Delaware corporation with its principal place of business
at 375 Hudson Street, New York, NY and is the U.S. affiliate of the Penguin Group, the
incorporated division of parent Pearson PLC. Penguin has settled with the U.S. Department of
Justice but not with the Plaintiff States.
B. Settled Defendants
10. Simon & Schuster, Inc. is a New York corporation with its principal place of business at
1230 Avenue of the Americas, New York, NY and is a subsidiary of CBS Corporation.
11. Hachette Book Group is a Delaware corporation with its principal place of business at
237 Park Avenue, New York, NY and is a subsidiary of Hachette Livre.
12. HarperCollins Publishers LLC is a Delaware corporation with its principal place of
business at 10 East 53rd Street, New York, NY and is a subsidiary of News Corporation.
13. Holtzbrinck Publishers, LLC d/b/a Macmillan and Macmillan Publishers, Inc. is a New
York limited liability corporation with its principal place of business at 175 Fifth Avenue, New
York, NY and is a subsidiary of Georg von Holtzbrinck GmbH & Co. KG.
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III. BACKGROUND
A. The Publishing Industry
14. The publishing industry is dominated by six large publishing houses, the five Publisher
Defendants plus non-defendant Random House. These six firms often are referred to together
within the publishing industry as the “Big Six.”1 Titles from the Big Six publishers accounted
for over 90% of all U.S. New York Times bestselling book sales in 2010.
15. Retailers purchase physical books directly from publishers, or through wholesale
distributors, and resell them to consumers. Retailers typically purchase physical books under the
“wholesale model.” Under that model, retailers pay publishers a wholesale price that typically is
approximately one-half of the list price of books, take ownership of the books, and then resell
them to consumers at prices of the retailer’s choice. Grandinetti Direct ¶¶ 22, 25. Publishers
have sold physical books to retailers through the wholesale model for over 100 years and
continue to do so today.
16. E-books are books published in electronic formats. Like physical books, e-books
traditionally have been distributed under wholesale terms. E-books reduce or eliminate a number
of meaningful costs compared to physical books, including costs associated with manufacturing,
freight, warehousing, and delivery to consumers.
B. Amazon Ushered in the Modern E-Book Era in 2007 with the Kindle Device and
Low E-Book Prices
17. Amazon’s Kindle, launched in November 2007, was the first e-reader to gain widespread
commercial acceptance. See, e.g., Grandinetti Direct ¶ 13; Porco Direct ¶ 8. As John Sargent,
1 See, e.g., PX-0018; PX-0520 at 1.
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Macmillan’s CEO wrote, Amazon “built an e book market pretty much from scratch.”
PX-0704.2
18. Amazon priced most e-book versions of current New York Times bestsellers and some
other new releases at $9.99. Grandinetti Direct ¶ 25. When Amazon launched its Kindle
business, many publishers set a digital list price for e-books that was 20% lower than the
equivalent physical list price to reflect cost savings compared to physical books. Grandinetti
Direct ¶¶ 22, 25; Porco Direct ¶¶ 9-11. This 20% discount on the wholesale price of e-books
meant that in many cases Amazon’s $9.99 price was essentially breakeven. Grandinetti Direct
¶ 25; Naggar Direct ¶ 8. By early 2009, Hachette, Simon & Schuster, Penguin, and
HarperCollins had raised their digital list prices so that they were the same or greater than
equivalent print list prices. Porco Direct ¶ 9; Naggar Direct ¶ 9. Hachette told Amazon that
“peer pressure” was a factor in its decision to raise the wholesale prices of e-books. Porco Direct
¶ 10; PX-0477.
19. In some cases, Amazon used the $9.99 titles as loss leaders, which is “quite common in
both bookselling and retailing generally.” Grandinetti Direct ¶ 25. In fact, it is “common” that
Amazon will lose money on some print bestsellers, and has found the strategy to be “successful,
sustainable, and profitable.” Id. Despite its higher wholesale costs of e-books, Amazon
determined that its pricing strategy was profitable and popular with consumers and thus saw no
reason to abandon the $9.99 price point. Naggar Direct ¶¶ 11-12, 15; Grandinetti Direct ¶ 28.
2 See also, e.g., PX-0385 at 18 (MAC0038381); PX-0424 at 4 (RH-USDOJ-00049865); PX-0410
at 4 (HC-TXAG-0588779); Genevieve Shore Dep. 83:12-19.
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20. Amazon’s $9.99 pricing was so popular with consumers that other e-book retailers often
matched it. PX-0179;3 PX-0204 at 14 (SS00028507); PX-0185 at 1.
21. From its very small base in 2007 at the time of Amazon’s Kindle launch, e-books have
exploded, registering triple-digit sales growth each year through 2011. PX-0770 at 14, 16
(APLEBOOK-00408520, 022). By 2011, e-books constituted approximately fifteen percent of
general interest fiction and non-fiction books (commonly known as “trade” books4) sold in the
United States. See id . at 14 (APLEBOOK-00408520).
C. Apple Never Wanted to Price Compete Against Amazon
22. Apple was aware that part of the reason for Amazon’s e-books success was Amazon’s
low prices. Eddy Cue Dep. 93:2-15; PX-0047. Apple also was familiar with Amazon’s
aggressive price competition bent from Apple’s experience selling digital music, movies, and
applications, where Amazon was a competitor. Mr. Cue testified that price is regularly a
“benefit[] or feature[]” that Amazon “tr[ies] to communicate” to consumers. Eddy Cue Dep.
22:7-12.
23. Apple was different. It competed primarily on the features of its hardware devices, and
was not interested in price competition. Phillip Schiller Dep. 56:5-57:8; Keith Moerer Dep.
199:24-200:16; Penguin (Timothy McCall) Dep. 145:23-146:94.
3 Barnes & Noble believed that it could operate profitably at $9.99. PX-0180 at 6 (BN0001895).
4 Non-trade e-books, which include electronic versions of children’s picture books and academictextbooks, reference materials, and other specialized texts that typically are published by separateimprints from trade books, often are sold through separate channels, and are not reasonablysubstitutable for trade e-books.
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24. When Mr. Cue was evaluating the e-books competitive landscape in February 2009, he
recognized that the “book publishers would do almost anything for us to get into the ebook
business.” PX-0027. Instead, though, he suggested to Steve Jobs that he “could see a scenario
where iTunes becomes an ebook reseller exclusive to Amazon and Amazon becomes an
audio/video iTunes reseller exclusive to Apple.” Id. In other words, Apple would stay out of
e-books if Amazon would stop competing against Apple in music and video.
D. Publisher Defendants Hated Amazon’s $9.99 Pricing
25. From the Kindle’s launch in late 2007, Publisher Defendants were complaining regularly
to Amazon executives about its e-book pricing. Grandinetti Direct ¶ 27; Porco Direct ¶ 9.5 In
particular, they complained about what one Publisher Defendant described as Amazon’s
“wretched” $9.99 pricing of hardcover bestsellers. PX-0274.6
26. Publisher Defendants believed that Amazon’s low prices would cause consumers to
become accustomed to the $9.99 price point. As one CEO put it, Amazon’s $9.99 pricing for
e-books was “destroying the value perceived by consumers” and over time, would not provide
enough money for publishers. Arnaud Nourry Dep. 21:22-24:8.7
27. Publisher Defendants worried that low consumer prices eventually would harm their own
economics because Amazon’s leadership as an e-book retailer could enable it to demand that
publishers lower their wholesale e-book prices—the so-called digital list price.8
5 See also PX-0676 at 1, 6.
6 See also PX-0154 at 2 (MAC0150967); PX-0343; PX-0438 at 2 (PEN013191); PX-0226.
7 See also PX-0078 at 4-9 (MAC01460081-086).
8 PX-0088 at 12 (MCMLN-LIT-00073699); PX-0229; PX-0778 at 3 (HBG00004309).
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28. Publisher Defendants also feared that consumers would begin to expect similar low retail
pricing on hardcover books, which usually were priced significantly above $9.99. Publisher
Defendants believed that such “price deflation” would harm their businesses as physical
wholesale prices were driven down, too. PX-0674 at 13 (HBG00004059).9
29. Finally, Publisher Defendants feared that Amazon would transition from being the
publishers’ business partner to becoming a competitor.10
PX-0133 at 2 (PEN-LIT-00008100);
PX-0210 at 1. Specifically, they worried that Amazon might begin contracting directly with
authors to publish their works, cutting out traditional publishers entirely.11
30. Accordingly, in March 2009, Macmillan CEO John Sargent met with Amazon and said
he was concerned about $9.99 pricing and that all the “pubs” were talking about it. PX-0240.
31. As Hachette Livre CEO Arnaud Nourry put it in an August 2009 Financial Times article:
“there are very recent books, bestsellers at $9.99, which means that all the rest will have to be
sold at between zero and $9.99. . . . Amazon is not in the business of losing money. So, one day,
they are going to come to the publishers and say: by the way, we are cutting the price we pay. If
that happens, after paying the authors, there will be nothing left for the publishers.” PX-0817.
Mr. Nourry told others at Hachette that “[t]he purpose of this paper was indeed to ‘invite’ other
voices to join!” PX-0411 at 1.
9 Plaintiffs anticipate that the testimony of Mr. Murray, Mr. Young, and Ms. Reidy willdemonstrate further that this was a concern among the publishers.
10 This phenomenon is known in the publishing industry as disintermediation, which Simon &Schuster defines as “being cut out of the market entirely as retailers contract directly withauthors.” PX-0505 at 2 (DOJ-SS0043165).
11PX-0167; PX-0383; PX-0665 at 2 (HC-TXAG-0832406); PX-0273 at 4 (HC-TXAG-
0837473); PX-0465 at 15 (RH-USDOJ-00001441).
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E. E-Books Would Have Been Available on the iPad No Matter What
32. Apple developed its iPad tablet with the vision that its “primary purposes” were to be
“browsing the web, e-mail, watching video, and using third party apps.” Apple (Eddy Cue) CID
Dep. 28:18-25. It did not begin seriously working on its own e-reader app until November 2009,
less than three months prior to the scheduled public unveiling of the device. Id. at 33:1-20.
33. Apple would have released the iPad regardless of whether it also began selling e-books.
As Mr. Moerer admitted in his capacity as Apple’s corporate representative, “I knew we were
launching a hardware device, and that hardware device, the iPad, was going to be launched with
or without a bookstore.” Apple (Keith Moerer) Dep. 36:17-24.
34. The iPad would have functioned as an e-reader (just as the iPhone already did) regardless
of whether Apple built its own e-reading app or began selling e-books itself. In his negotiations
with Publisher Defendants, Apple’s Eddy Cue communicated that if they did not reach
agreement with Apple, Apple would “let others build book store apps (like we already have from
Amazon, Barnes & Noble, etc.).”12
35. In July 2011, a few months after non-defendant Random House made its titles available
in the iBookstore, Apple changed its practice of allowing third-party e-reader apps to include
hyperlinks to their own e-book stores. Scott Forstall Dep. 67:22-68:4. When its competitors
resisted Apple’s decision, Apple removed their e-reader applications from its App Store. Apple
executive Phil Schiller explained: “I want the message to these guys (mostly Google and B&N)
12
PX-0513 at 1; PX-0512 at 1; PX-0120 at 1; PX-0511 at 1; PX-0059 at 1; see also Apple (EddyCue) CID Dep. 119:19-24; Naggar Direct ¶ 6; PX-0452.
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to be: we don’t care if they put their apps back up or not, we are fine with or without them on
our store.” PX-0256 at 1.
IV. PUBLISHER DEFENDANTS SOUGHT TO RAISE RETAIL E-BOOK PRICES36. Throughout 2009, Publisher Defendants engaged in a series of attempts to induce
Amazon to raise its consumer prices for e-books. These attempts, though not necessary to
Publisher Defendants’ ultimate conspiracy with Apple, are relevant as evidence of the
willingness of Publisher Defendants to work together to effect market change, and specifically,
to collude in order to raise consumer e-book prices.
A. The Publishing Industry Is Well-Suited to Coordinated Pricing and Interaction
37. Publisher Defendants compete in the sale and marketing of books, as well as in the
acquisition of rights to publish books.13 But publishers also tend to view each other as “partners”
or “colleagues” in a “club.” PX-0416; PX-0466 at 1.14 Publisher Defendants’ settlements with
the United States in this action disrupted cozy communications among publishers that had been
going on for at least thirty years.
38. There are numerous opportunities for publishers to share competitively sensitive
information with one another. Publisher Defendants’ CEOs and other senior executives meet
with each other at various meetings or events, such as meetings of the Association of American
13
E.g., John Makinson Dep. 102:2-102:9; Penguin (Timothy McCall) Dep. 244:18-245:2.
14See also PX-0083 (Mr. Sargent’s “greatest worry is that our colleagues will be very bad at
pricing” once the agency model goes into effect); PX-0666 at 1; PX-0245 at 1-3; PX-0274.
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Publishers.15
They communicate frequently with each other over the telephone and, in the past,
have dined together to discuss matters of common industry concern.
39. On at least three occasions, the CEOs of all or most of Publisher Defendants met for
dinners in the private dining rooms of New York restaurants, without counsel present, to discuss
business matters.16 The stated purpose of one of these dinners was to welcome Markus Dohle,
the new CEO of Random House. John Makinson Dep. 154:19-157:25. As reported in the recap
of the dinner in HarperCollins’s “Executive Minutes,” one topic of conversation at that dinner
was educating Mr. Dohle “how decisions get made” in the publishing industry. PX-0208 at 2
(HC-TXAG-0577400); see also PX-0390 at 1 (Ms. Reidy reported that she “learned much of
interest at” the June 2009 “CEO dinner . . . . Harper, by the way, is also ‘standard’ with
Amazon.”).
B. Publisher Defendants Shared Competitively Sensitive Information with Each Other
40. Publisher Defendants communicated with one another about their relationships with
Amazon. One example is Macmillan’s Executive Board Member Rüdiger Salat seeking the
opinion of HarperCollins’ Mr. Murray on its activities with Amazon. PX-0211 at 1.
41. On another occasion, Tim McCall, Penguin’s VP of Online Sales & Marketing, told his
Penguin colleagues that he would speak to his friend at HarperCollins to learn what steps
Amazon was taking in connection with how some e-books were priced. PX-0327 at 1. And
15 PX-0672 at 2 (HBG-YOUNG000099490); PX-0377 at 1; PX-0098.
16 PX-0810 at 8-9 (USDOJ-00039116-117); John Makinson Dep. 154:3-18.
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ultimately institute a MAP policy, though, because it could not be assured that other publishers
would follow its lead: “we’ve always known that unless other publishers follow us there’s no
chance of success in getting Amazon to change its pricing practices. . . . And of course you were
right that without a critical mass behind us Amazon won’t ‘negotiate,’ so we need to be more
confident of how our fellow publishers will react if we make a move like this.” PX-0344.
Accordingly, Simon & Schuster CEO Carolyn Reidy concluded that, with respect to the
possibility of instituting a MAP policy: “clearly we need to ‘gather more troops’ and
ammunition first!” Id.
46. For its part, Penguin developed—but never instituted—an incentive plan whereby
retailers would be given greater wholesale discounts in return for charging consumers higher
prices. Timothy McCall Dep. 47:22-58:6; PX-0329 at 2 (PEN675466).
D. Groups of Publisher Defendants Discussed Raising Retail E-Book Prices in the
Context of Potential Joint Venture Conversations
47. In 2009 and 2010, Publisher Defendant CEOs and other executives met frequently to
discuss a number of joint venture possibilities relating to e-books. Nothing substantive came of
the conversations in the U.S. until a modest book recommendation site (www.bookish.com) was
launched in February 2013 by Hachette, Penguin, and Simon & Schuster. The meetings
themselves, though, offered Publisher Defendants opportunities to discuss how they could work
collectively in pursuit of higher retail e-book prices. Indeed, establishing higher retail e-book
prices was itself to be the primary purpose of the potential joint ventures discussed most
intensively in 2009.
48. For example, when Brian Napack, Macmillan’s President, met with HarperCollins CEO
Brian Murray in April 2009 to discuss the creation of “an industry consortium” to sell e-books,
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a presentation developed for a meeting with Penguin and Hachette, one purpose of the potential
joint venture was to “[d]efend against further price erosion.” PX-0358 at 6 (DOJ-SS0046224, at
slide 5).
52. Once the Apple Agency Agreements were in place, any urgency of these joint venture
discussions evaporated. See, e.g., PX-0815. Publisher Defendants, however, continued to use
joint venture discussions to coordinate their agency negotiations with Amazon. For example, at
a joint venture meeting in March of 2010, Hachette executive Maja Thomas learned from
Penguin that Penguin was far from agreement with Amazon. PX-0741.
E. Publisher Defendants Used Coordinated Windowing as a Tool to Try to Force
Amazon to Raise Its Retail E-Book Prices
1. Single-Title Windowing
53. From the beginning of the modern e-book era, electronic versions of new titles were, to
the extent feasible, typically released on the same day as their physical counterparts. Grandinetti
Direct ¶ 31. In the summer and fall of 2009, some publishers experimented with delaying the
electronic release of a title or two until some weeks or months after its physical release. This
phenomenon was known as “windowing” the e-book. Id. at ¶ 32.
54. Publisher Defendants communicated to one another their plans to window specific titles,
which they believed would pressure Amazon to raise its retail e-book prices. For example, in an
August 14, 2009 e-mail to Hachette Livre CEO Arnaud Nourry, Hachette Book Group CEO
David Young writes: “Completely confidentially, [Simon & Schuster CEO] Carolyn [Reidy] has
told me that they are delaying the new Stephen King, with his full support, but will not be
announcing this until after Labor Day . . . .” PX-0274.
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55. In the same e-mail, Mr. Young criticized Random House CEO Markus Dohle as an
“appeaser” for his refusal to window Dan Brown’s The Lost Symbol : “You should know that I
have been told by a reliable source that the [internal Random House] publishers voted for the
Dan Brown to be delayed but they were over-ruled by Markus who is apparently ‘obsessed’ by
his desire to meet Jeff Bezos: why this should matter to him and what he thinks he would gain
from such a meeting is beyond me. He appears to be an appeaser which is not good with them
being the market leader. . . .” Id . Mr. Young’s “reliable source” was a senior Random House
executive who subsequently joined Macmillan in the fall of 2009.
56. Mr. Young concluded this e-mail containing confidential information about Hachette’s
competitors’ business plans by advising Mr. Nourry that he should permanently destroy the
message: “I think it would be prudent for you to double delete this from your email files when
you return to your office.” Id.
2. Systematic Windowing
57. In December of 2009, four Publisher Defendants—Hachette, Simon & Schuster,
HarperCollins, and Macmillan—announced plans to begin windowing new releases on a
systematic basis. Grandinetti Direct ¶¶ 33-35. These efforts were coordinated and were
designed to pressure Amazon to increase its retail e-book prices. See, e.g., PX-0458 (“You may
have seen the recent press attention to moves by publishers (including us) to ‘window’ release of
eBooks . . . . This move is mostly in response to Amazon’s low pricing of eBooks and is creating
a lot of heated discussion.”). Publisher Defendants recognized that windowing their new
releases was contrary to their unilateral economic interests, and ultimately did not window very
many titles.
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58. On December 3, 2009, Hachette Livre CEO Arnaud Nourry met at breakfast with
Amazon’s Vice President of Kindle Content, David Naggar. During that meeting, Mr. Nourry
told Mr. Naggar that Amazon’s $9.99 pricing posed a “big problem” for the industry. Naggar
Direct ¶ 18. According to Mr. Nourry, raising e-book prices by even one or two dollars would
“solve the problem.” Mr. Naggar, however, did not agree. Id.; see also PX-0437.
59. The following day, a Friday, Hachette and Simon & Schuster (along with Penguin) met at
Hachette’s offices, purportedly to discuss a joint venture. John Makinson Dep. 302:17-23
Hachette informed Amazon later that day that it intended systematically to window several of its
e-book titles. Naggar Direct ¶ 19.
60. The following Monday, December 7, Simon & Schuster informed Amazon that it too
intended systematically to window several of its e-book titles. Naggar Direct ¶ 21; PX-0781 at 4
(AMZN-MDL-0027585).
61. The first public announcement of these publishers’ new windowing policies did not come
until a December 9 Wall Street Journal article. Jeffrey A. Trachtenberg, Two Major Publishers
to Hold Back E-Books, WALL ST. J., Dec. 9, 2009 (available online December 8, 2009), at B1
(PX-0617).
62. HarperCollins soon followed with its own windowing announcement. PX-0781 at 4
(AMZN-MDL-0027585); Naggar Direct ¶ 21.
63. The following week, Macmillan joined the publishers that had announced windowing
policies. PX-0781 at 4 (AMZN-MDL-0027585); Naggar Direct ¶ 21.
64. Even beyond this timeline, there is ample evidence that Publisher Defendants coordinated
these new windowing policies. For example, on December 9, Mr. Nourry reached out to Stefan
von Holtzbrinck of Macmillan to offer his input on the windowing strategy. PX-0447 at 1. On
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3. The Threat of Windowing, by Itself, Was Unlikely to Move Amazon’s Prices
Due to Insufficient Publisher Participation and Risks Inherent in the Strategy
68. Publisher Defendants recognized that the windowing strategy had no hope of achieving
their pricing goal if the Big Six publishers did not present a united front on the matter. As
Hachette Livre’s Mr. Nourry explained: “To succeed our colleagues must know that we entered
the fray and follow us.” PX-0393; PX-0394 (certified English translation). Penguin executive
Tim McCall concurred: “If other publishers don’t follow suit,” Amazon’s $9.99 pricing “will
continue, and we’ll lose.” PX-0427.
69. Penguin and Random House, though, ultimately decided not to window, preferring
instead “to take market share as a result.” PX-0276. Hachette’s Young found that stance
“deeply divisive and disappointing.” Id.
70. Ultimately, the four windowing Publisher Defendants delayed release of only 37 books,
total. Benjamin Klein Dep. 39:23-40:6. With Publisher Defendants divided and inconsistent on
the short-term “tactic,” Amazon continued to price newly released and bestselling e-books at
$9.99 and windowing was failing even before the Apple Agency Agreements went into effect.
Grandinetti Direct ¶ 35.
V. IN RECOGNITION OF THEIR SHARED GOALS, APPLE AND PUBLISHER
DEFENDANTS AGREED TO INCREASE THE PRICE OF E-BOOKS TO
CONSUMERS AND RESTRAIN RETAIL E-BOOK PRICE COMPETITION71. Apple began reaching out to major trade publishers on December 8, 2009 to set up in-
person meetings for the following week. Over December 15 and 16, 2009, Eddy Cue, Keith
Moerer, and Kevin Saul of Apple met in Manhattan with the CEOs and other executives from
each of the Publisher Defendants plus Random House. Apple walked into those meetings
“knowing” that the publishers as a group “were unhappy with their biggest retailer.” Apple
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(Eddy Cue) CID Dep. 42:13-43:6. The source of that unhappiness was, as Eddy Cue reported to
Steve Jobs on December 10, 2009, Amazon’s “new release pricing.” PX-0050; PX-0025;
PX-0371. From the beginning of these meetings, Publisher Defendants made clear to Apple that
they believed e-book prices were “too low.” Apple (Eddy Cue) CID Dep. 42:13-43:12; 47:5-
48:5.
72. Apple worked to facilitate the conspiracy in several different ways. First, Apple assured
Publisher Defendants that none of them would have to move alone; Apple would allow the
conspiracy to move forward only if a critical mass of publishers agreed. From their own
perspective, Publisher Defendants feared that any one of them acting alone would be subject to
retaliation from Amazon, and communicated that to Apple. Eddy Cue Dep. 349:25-350:12.
Apple wanted to get them over the fear of being singled out by Amazon by providing them
assurances that they would not be alone. Id. at 336:8-24.
73. Second, Apple assured Publisher Defendants that they all would get materially the same
deal, including the same retail price tiers. David Shanks Dep. 286:25-287:4, 288:17-23; Eddy
Cue Dep. 300:3-13. As Mr. Cue has admitted, Apple assured Publisher Defendants that the first
e-books contract Apple signed would be materially the same as the last one it signed. Eddy Cue
Dep. 127:21-128:22. Another Apple executive similarly testified that Apple guaranteed the
publishers a “level playing field.”19 Kevin Saul Dep. 171:24-172:23.
74. Third, Apple kept each Publisher Defendant apprised of its negotiations status with
others.
19 See also Penguin (David Shanks) CID Dep. 72:15-73:19 (Apple made clear in its initial proposal that Apple was going to have “one contract that fit all” and “the same agreement for everybody.”).
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75. Fourth, Apple insisted on including in each agency agreement a most-favored nation
(“MFN”) clause that sharpened each Publisher Defendant’s incentive to force Amazon onto
agency, and to do so at the same time—before the iBookstore launched in April 2010.
76. In February of 2011, Penguin CEO David Shanks described Apple’s role in facilitating
the conspiracy in response to a suggestion that Penguin’s Canadian subsidiary meet with the
other major publishers and Indigo, the largest Canadian bookseller, to discuss how they all could
work together to raise e-book prices in Canada: “We would never meet with Barnes and all our
competitors. The Government would be all over that. We would meet separately with Indigo
being the facilitator and go between. That is how we worked with Apple and the
government is still looking into that.” PX-0542 at 1 (emphasis added).
A. Apple Began Reaching Out to Publishers on December 8, 2009
77. On December 8, 2009, Apple’s Eddy Cue began reaching out by telephone to all of the
“Big Six” publishers to schedule meetings in New York the next week. PX-0314. In making
his initial outreach calls, Mr. Cue told some publishers that he also would be meeting with other
members of the “Big Six.” Id.
78. Mr. Cue first spoke to HarperCollins CEO Brian Murray and Random House CEO
Markus Dohle. On December 11, Mr. Cue called Macmillan CEO Mr. Sargent. Mr. Cue told
him that he would be meeting with a “couple of” other Publisher CEOs. PX-0073.
79. By December 11, Apple had made arrangements to meet with each of the “Big Six” on
December 15 and 16. PX-0362 at 1-2.
80. Before its initial meeting with the publishers, Apple anticipated entering the e-books
business under the existing wholesale distribution model. Eddy Cue Dep. 107:17-21.
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B. Some Publisher Defendants Considered Agency Prior to Initial Apple Meetings
81. In the Fall of 2009, Barnes & Noble had encouraged the publishers to move to agency as
a means to free itself from having to compete against Amazon on price, but was unable to
convince any publisher to try. See PX-0434; PX-0682. Barnes & Noble was not able (and
perhaps did not even try) to assure the publishers that they would be moving as a group, with no
risk that any one could find itself isolated as the lone agency-mover—risking higher retail prices,
lower per unit revenues, and Amazon’s displeasure all by itself. Apple, though, which had not
already sunk costs into e-book distribution and was not dependent on selling physical books,
could credibly assure each Publisher Defendant that it would not be the only one to move to
agency. As Mr. Nourry wrote in December 2009, “preventing” Amazon “from selling at 9.99”
would require “the help of Apple or Google.” PX-0108 at 1. And as Mr. Murray elaborated in
January 2010, “only google and apple can compete with Amazon and Apple looks more
promising that [sic] Google right now.” PX-0307 at 3 (HC-DOJ-0149470); see also PX-0320 at
3 (MCMLN-LIT-00041316).
82. On December 10, Maja Thomas, Hachette’s Senior Vice President Digital, spoke to Betty
Woodmancy, then HarperCollins’s Vice President of Retail Business Development (Symtio
Division), and told Ms. Woodmancy that Hachette was considering a “different business model”
for distributing its digital content. Ms. Woodmancy recounted in an e-mail that Ms. Thomas
“just wanted to run it by us to get our feedback.” PX-0456 at 1. Ms. Woodmancy’s e-mail
quickly made its way to HarperCollins CEO Brian Murray: “Essentially, it is the iTunes model.
Hachette is the ‘seller’ to the customer—they set the selling price and retailers are not allowed to
discount off that price. They would pay their ‘agents’ a 30% commission on each sale.” Id.
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C. Apple Held Initial Meetings with Big Six Publishers on December 15 and 16, 2009
83. On December 15 and 16, 2009, Apple met separately in New York with the CEOs of
each of the six largest publishers. Apple (Eddy Cue) CID Dep. 35:3-16; PX-0262 at 1-3. In
these initial meetings, Apple told the publishers that it expected to proceed under a wholesale
relationship.20 Indeed, Apple could have begun reselling e-books, with little or no negotiation
required, simply by taking advantage of the publishers’ then-existing, publicly available terms of
sale. See Porco Direct ¶ 6.
84. Apple, by now well aware of publisher hostility to Amazon’s $9.99 price point, played to
these concerns in its meetings with the publishers. Arnaud Nourry Dep. 140:5-14.
85. Apple informed the publishers that it would not be pursuing a low price strategy.
PX-0359 at 3 (SS00027182). Ms. Reidy recounted her meeting with Mr. Cue to her boss as
follows: “[Apple is] not interested in a low price point for digital books . . . . They also cannot
tolerate a market where the product is sold significantly more cheaply elsewhere . . . i.e., they
don’t want Amazon’s $9.95 to continue.” PX-0510. The publishers felt that “[i]t was
comforting . . . that Apple said that it isn’t interested in pursuing a low cost provider strategy.”
PX-0360. As a result, Apple was perceived as the publishers’ best partner “because they don’t
like deep discounting.” PX-0148 at 3 (HC-DOJ-0087651). Mr. Cue also expressly assured the
publishers that consumers would be willing to pay a higher price for e-books. Penguin (David
Shanks) CID Dep. 69:7-71:24; Timothy McCall Dep. 68:4-68:23, 186:7-186:23; PX-0338
20
PX-0359 at 3 (SS00027182); PX-0301 at 1; Timothy McCall Dep. 65:19-67:20, 113:22-114:11; Apple (Eddy Cue) CID Dep. 44:3-13.
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(Random House executive reporting to Mr. Dohle that Rupert Murdoch “had been briefed by
Apple that they were launching their ereader in 90 days and will be selling books at 15 dollars”).
86. Apple made very clear in its conversations with each publisher that it was talking with
their competitors as well. Penguin (David Shanks) CID Dep. 71:23-72:2.
87. Apple also passed along information from one publisher to the next as the initial meetings
progressed. For example, at their December 16 meeting, Apple and Simon & Schuster discussed
what other publishers wanted in terms of pricing of e-books—“other publishers want $13-$15
range”—and that the price was achievable “by including extra material.” PX-0359 at 3
(SS00027182).
88. For their part, the publishers’ response to Apple in these initial meetings was primarily
focused on their displeasure with Amazon’s low $9.99 pricing. Eddy Cue Dep. 120:17-25;
Apple (Eddy Cue) CID Dep. 42:13-43:17, 47:5-24; PX-0036 at 3 (APLEBOOK-01601745).
89. After conferring with one another, Hachette and HarperCollins raised the agency model
in their preliminary discussions with Apple. Eddy Cue Dep. 125:10-14; PX-0306 at 3
(APLEBOOK-01601745). HarperCollins told Apple that it was interested in using the agency
model as a way “to fix Amazon pricing.” PX-0036 at 3 (APLEBOOK-01601745).21
Hachette
supported an agency model in part because the “logic of agency agreement is that everyone has
to be under the same terms.” Arnaud Nourry Dep. 153:24-155:4. However, Apple initially told
21
Similarly, a Hachette executive is expected to testify that the agency model would meet thegoal of publishers setting the retail price of e-books and would address some of its concerns with$9.99 pricing.
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HarperCollins and Hachette that it would not agree to an agency model. PX-0036 at 3
(APLEBOOK-01601745); PX-0281 at 1.
90. Mr. Cue e-mailed to Mr. Jobs a report of his three publisher meetings on December 15.
Mr. Cue wrote that “[c]learly, the biggest issue is new release pricing” and that each publisher
disliked the “$9.99 price point.” PX-0050 at 1-2. Nonetheless—and while contemplating a
wholesale regime with other e-book retailers selling some titles below cost—Mr. Cue’s headline
analysis to Mr. Jobs was: “Nothing scared me or made me feel like we can’t get these deals done
right away.”
D. Apple Embraced Agency and Higher E-Book Prices Following Its Initial Meetings
with Publisher Defendants
91. After his first set of meetings with the publishers in Manhattan, Mr. Cue returned to
California. Eddy Cue Dep. 176:2-7. There, he discussed the publisher meetings with Apple’s
Steve Jobs. Id . at. 176:8-14. On December 18, 2009, a little more than 24 hours after
completing his initial meetings, Apple had decided that it could do better than entering a very
competitive space on wholesale terms and had embraced the Hachette/HarperCollins-proposed
agency model. PX-0043.
92. The way to avoid having to compete against Amazon on price, Apple realized, was to use
an “a[i]kido move” to move all retailers to agency. PX-0514 at 11 (p. 504). Steve Jobs
succinctly described the move to his biographer: “we told the publishers, ‘We’ll go to the
agency model, where you set the price, and we get our 30%, and yes, the customer pays a little
more, but that's what you want anyway.’” Id. at 10 (p. 503) (emphasis added).
93. The success of Apple’s “aikido move” would depend on having a significant number of
major publishers agree to move to agency together. Apple (Eddy Cue) CID Dep. 51:5-53:22.
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97. In total, there were upwards of 100 telephone calls between Publisher Defendant CEOs
between December 8—when Mr. Cue began to reach out to the publishers—and January 26
when Publisher Defendants had all signed their Apple Agency Agreements. In contrast, there
was exactly one phone call between publisher CEOs from December 1 through December 7 and
not a single phone call between January 27 and January 31. PX-0787. On January 16, Mr. Cue
informed the publishers that he needed their commitment by January 21. See PX-0707 at 3
(HBG00071037) (January 19, 2010 e-mail from Maja Thomas to others at Hachette noting that
Apple “need[s] the agreement signed by Thursday”); Eddy Cue Dep. 313:1-10. It is, therefore,
unsurprising that Publisher Defendants’ CEOs made upwards of twenty-five calls on January 21,
the most calls on any single day in December or January. PX-0787.
98. On December 10, 2009, having spoken with Mr. Cue, HarperCollins began work on a
proposal for Apple. Aware that Apple also was going to speak to Random House, PX-0314,
HarperCollins CEO Brian Murray wrote in an internal e-mail that HarperCollins’s proposal to
Apple should “bring RH in if possible.” PX-0304. Five minutes later, Mr. Murray e-mailed
Random House CEO Markus Dohle and requested that the two meet the next day. PX-0448.
Mr. Murray and Mr. Dohle did not meet the next day, but they did speak by phone for
approximately 17 minutes. PX-0788 at 1 (Mr. Murray’s phone records identify the call as
coming from Random House’s main number).
99. During the time of Apple’s initial meetings with Publisher Defendants, there was another
flurry of inter-publisher communications between Ms. Reidy and Mr. Young. See PX-0787.
Most notably, Mr. Young and Ms. Reidy once again called and e-mailed each other repeatedly.
Ms. Reidy called Mr. Young on December 16 just minutes after her meeting with Mr. Cue
finished. PX-0362 at 2 (APLEBOOK-00424586); PX-0787 at 1. After three additional calls on
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December 17, including one where Mr. Young called Ms. Reidy from his office and the two
spoke for 9 minutes and 42 seconds, Ms. Reidy e-mailed Mr. Young at 8:23 P.M. to get Mr.
Cue’s contact information. PX-0787 at 1; PX-0789 at 2. Ms. Reidy said she wanted to “take up”
Mr. Young’s suggestion about getting in touch with Apple regarding the “term sheet.” PX-0299.
Ms. Reidy e-mailed Mr. Cue later than night, and then told Mr. Young the next day that she had
done so. PX-0602.22
100. Hachette Livre CEO Arnaud Nourry and Penguin Group CEO John Makinson also met
on December 16, one day after both Penguin and Hachette met with Apple, ostensibly to discuss
a proposed joint venture. PX-0138 at 1; PX-0468. In a follow-up e-mail within Hachette,
Mr. Nourry described certain joint venture-related topics that had been discussed, but reserved
the other portions of the meeting to be “shared with you on the phone.” PX-0468. An e-mail
from Mr. Makinson to his colleagues, however, reveals at least some of the topics that Mr.
Nourry would not put into an e-mail: during the meeting, Mr. Nourry brought up Hachette’s
Apple meeting of the day before, in addition to “pressur[ing]” Mr. Makinson to “join the
windowing movement in the US.” PX-0541 at 1; PX-0332; John Makinson Dep. 310:18-313:13,
314:2-18, 315:4-316:5, 325:4-327:10.
101. Similarly, on December 17, a Random House executive reported to Mr. Dohle that she
had just spoken to Rupert Murdoch, the CEO of HarperCollins’s parent company, News Corp.
22 Ms. Reidy and Mr. Young also had called one another repeatedly on December 10, 11, and 15,including a call each day over three minutes. PX-0787. On December 15, Ms. Reidy and Mr.Young spoke on the phone fewer than twenty minutes prior to Mr. Young’s meeting with Mr.Cue. PX-0362 at 1; PX-0787.
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The executive reported that Mr. Murdoch “had been briefed by Apple that they were launching
their ereader in 90 days and will be selling books at 15 dollars.” PX-0338.
102. Penguin USA CEO David Shanks admitted that he met with Ms. Reidy and Mr. Young
during the Apple negotiations, ostensibly to get the Muse joint venture off the ground. Shanks
Dep. 223:12-22. Ms. Reidy will testify that at the end of one such meeting, Mr. Young
volunteered that he was intrigued with the agency model.
VI. EDDY CUE CONVEYED INDUSTRY-WIDE AGENCY MODEL PROPOSAL IN
DECEMBER 21, 2009 CONVERSATIONS WITH THE CEOS OF SIMON &
SCHUSTER, MACMILLAN, AND RANDOM HOUSE103. On Friday, December 18, 2009, Mr. Cue sent identical e-mails to the CEOs of Simon &
Schuster and Macmillan: “I am back in NY for a vacation. Do you have anytime Mon or Tue to
get together? I want to update you all my findings and thoughts. I have some things I want to run
by you. I only need 30 minutes.” PX-0502; PX-0501. Mr. Cue also sent a nearly identical
e-mail to the CEO of Random House. PX-0056. Mr. Cue spoke with all three CEOs by
telephone on Monday, December 21. PX-0788 at 2.
104. The substance of those conversations is clear from the e-mails that followed from Simon
& Schuster CEO Carolyn Reidy, Macmillan CEO John Sargent, Random House CEO Markus
Dohle, and Mr. Cue himself. Apple had given more thought to the agency proposal made in the
first round meetings by Hachette and HarperCollins “to fix Amazon pricing,” PX-0036 at 3
(APLEBOOK-01601745), and had decided to adopt it. In essence, Apple offered the publishers
a deal where they could set customer prices at $12.99 instead of $9.99 and demanded in return a
30% commission and a guarantee that the publishers would move all of their other e-book
retailers to agency, too.
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about the consumer perception. Therefore he suggests an ‘agency model.’” Id. Mr. Dohle also
relayed Mr. Cue’s explanation of why Apple would rather have all retailers on agency
relationships than have lower e-book wholesale prices—Apple did not want to compete with
Amazon on price: “He assumes that if we did find a new TOS [i.e., terms of sale, or wholesale]
model which would provide APL with an acceptable margin, Amazon would lower the prices
again . . . .” Id. Mr. Dohle also reported that Mr. Cue advised Random House to withhold
e-books from Amazon if Amazon balked at moving to an agency relationship: “I also indicated
that Amazon would not accept a distributor [i.e., agency] model. He answered that windowing
could be used to establish a distributor model . . . .” Id.
108. Finally, Mr. Cue sent his own summary of his December 21 conversations with the
publisher CEOs to Mr. Jobs: “I had good meetings with 3 publishers. All the talks went well
and everyone understood our position and thought it was reasonable.” PX-0043. Most
important, Mr. Cue explained that the publishers correctly recognized that “the plus” of the deal
Apple was offering had nothing at all to do with Apple’s entry or otherwise expanding e-book
output, but rather was that Apple’s industry-wide agency proposal “solves Amazon issue.” Id.
That is, just as HarperCollins had explained when it first suggested agency to Apple, the purpose
of adopting Apple’s agency model was “to fix Amazon pricing.” PX-0036 at 3 (APLEBOOK-
01601745).
VII. APPLE’S SUBSTANTIVELY IDENTICAL E-MAILS TO PUBLISHER
DEFENDANTS ON JANUARY 4 AND 5, 2010 SET FORTH THE PRINCIPLES
OF THE CONSPIRACY AMONG APPLE AND PUBLISHER DEFENDANTS109. On January 4 and 5, 2010, Apple’s Eddy Cue sent substantively identical term sheet
e-mails to each of the “Big Six” publisher CEOs. He framed the e-mails differently, though,
depending on whether he had already informed the CEO in question that Apple’s proposal was
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meant to satisfy the collective goals of all six publishers. Mr. Cue wrote to the three CEOs with
whom he had not spoken since Apple’s initial round of publisher meetings: “ After talking to all
the other publishers and seeing the overall book environment, here is what I think is the best
approach for ebooks.”23 To the three other CEOs—with whom he had discussed the contours of
Apple’s agency proposal on December 21, 2009—Mr. Cue wrote instead: “As we discussed,
here is what I think is the best approach for e-books.”24
Plainly, one piece that Mr. Cue
considered important in his discussions with Mr. Dohle, Mr. Sargent, and Ms. Reidy on
December 21 was that Apple was making its agency proposal “[a]fter talking to all the other
publishers and seeing the overall book environment.”
110. The substance of the term sheets reflected both Apple’s goal to be protected from price
competition by other e-book retailers and the publisher goal of forcing consumer e-book prices
higher than the then-prevailing $9.99 for new releases and bestsellers. Apple was unwilling to
be the only e-book retailer on an agency model because it would be exposed to price competition
from retailers that were still on the wholesale model and thus would retain control over their own
retail prices. To satisfy Apple’s interest, Mr. Cue explicitly demanded that not just Apple but all
e-book retailers be stripped of price-setting authority: “all resellers of new titles need to be in
23 PX-0041(Hachette) (emphasis added); PX-0306 (HarperCollins) (emphasis added); PX-0040(Penguin) (emphasis added).
24 PX-0473 (Random House); PX-0476 (Macmillan); PX-0021(Simon & Schuster). Mr. Cueultimately sent Macmillan CEO John Sargent both versions of the e-mail. PX-0476 (Jan. 4, “Aswe discussed”); PX-0076 (Jan. 6, “After talking to all the other publishers and seeing the overall book environment”).
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agreement” that the “agency model should hold for all retailers; these would become our terms.”
PX-0355 at 1.
VIII. APPLE’S FOLLOW-UP COMMUNICATIONS WITH THE PUBLISHERS WERE
DESIGNED TO FACILITATE COLLECTIVE PUBLISHER ACTION
113. In its follow-up telephone calls to the publishers, Apple assured them of their fellow
publishers’ lock-step reaction to Apple’s term sheet. For example, Ms. Reidy reported to her
parent corporation’s CEO Mr. Moonves that Apple’s Keith Moerer informed her in a January 8,
2010 conversation that “what we said to him was exactly what all the other publishers had
said: the pricing was too low.” PX-0537 at 1 (emphasis added).
114. Likewise, in his January 9, 2010 conversation with Madeline McIntosh of Random
House, Mr. Moerer informed her both that “[o]thers have advocated for higher price tiers” and
that Random House was “the least receptive to [Apple’s] proposal.” PX-0174 at 1.
115. Mr. Moerer’s call with Ms. McIntosh provides further evidence of Apple’s conscious
commitment to its common scheme with the publishers. As documented in Ms. McIntosh’s
detailed summary of their conversation—which she sent to her boss, Mr. Dohle, as well as
several other Random House executives—Mr. Moerer explicitly told Ms. McIntosh that Apple
had “decided they had to come up with a way that would move the whole market off 9.99 and
they think an agency model is the only way to do it.” Mr. Moerer also explained Apple’s
expectation that none of the publishers “will try to manage their business with Apple on agency
and other retailers on [wholesale] terms.” Id.
116. On January 11, 2010, Apple’s Keith Moerer sent identical e-mails to the CEOs of
Penguin, Simon & Schuster, and Hachette. Each e-mail contained a pricing analysis that set
forth, for each of the publishers’ titles that were listed on the New York Times hardcover fiction
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goal: a Most Favored Nation clause (“MFN”). Apple (Eddy Cue) CID Dep. 77:4-14. These
MFN clauses, identical in each of the January 11 draft E-book Agency Distribution Agreements,
obligated the publishers to lower the iBookstore customer price of a particular new release
e-book to match a lower price on that e-book offered by any other e-book retailer.30 Apple’s
Kevin Saul testified that the MFN was an “elegant way of enabling us to compete,” Kevin Saul
Dep. 155:20-156:4, that provided an “elegant solution” to its problem of having to compete on
price against retailers like Amazon, id. at 163:7-16.
120. Apple understood that the MFN clause “was a way to protect” itself from price
competition with Amazon by forcing the publishers to move all other retailers to agency. See
Peter Alcorn Dep. 122:22-124:20; PX-0065 at 1.
121. The publishers initially resisted the MFN clause, Genevieve Shore Dep. 325:19-327:4;
PX-0107 at 1; PX-0310 at 1, with at least two publishers—Macmillan and HarperCollins—
basing their objections on legal concerns. Eddy Cue Dep. 301:23-302:7, 310:20-311:22, 342:3-
343:7; PX-0563 at 1. A Macmillan executive internally identified the antitrust risk of signing the
agency agreement with the MFN as being “huge.” PX-0320 at 3 (MCMLN-LIT-00041316).
122. In resisting the MFN, publishers sought to assure Apple that, even without it, all retailers
would be moved to agency. Apple (Eddy Cue) CID Dep. 87:7-12. But Apple, perhaps not
entirely trusting Publisher Defendants, insisted on including the MFN. Eddy Cue Dep. 300:25-
302:14.
30 PX-0249 at 5 (APLEBOOK-00012765); PX-0285 at 5 (APLEBOOK-00012781); PX-0322 at5 (APLEBOOK-00012797); PX-0286 at 5 (APLEBOOK-00012813); PX-0248 at 5(APLEBOOK-00012749).
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123. The MFNs in the Apple Agency Agreements effectively locked the publishers into their
commitment to impose agency terms on Amazon and other retailers. See, e.g., PX-0529 at 12
(HC-TXAG-0816834). This was because a Publisher Defendant that had signed an agency
agreement with Apple would be vulnerable to pricing decisions by another, wholesale-model
retailer, namely Amazon. Gilbert Direct ¶ 96; see also Baker Direct ¶ 78 (… “[t]he MFN
sharpened a publisher’s incentive to convert Amazon because it effectively penalized a publisher
for not doing so”). The MFN required each Publisher Defendant to match at the iBookstore a
lower price for a title sold at any other retailer even if the publisher did not set that lower price
(i.e., the book was sold on the wholesale model).
124. HarperCollins executives acknowledged that the implication of the MFN clause would be
to change Amazon’s model and raise the price of e-books. PX-0529 at 12 (HC-TXAG-
0816834). The CEO of Penguin’s parent company wrote to her board in January 2010 that “we
don’t think” the agency and wholesale models “can coexist very long, and so we’re going to be
telling all our re-selling middlemen (Amazon, Barnes & Noble, e.g.) that we’re going to deal
with them for eBooks on the agency basis in the future, too.” PX-0530 at 2 (PEN831800).
Another Penguin executive testified that Penguin had to move Amazon and its other retailers to
the agency model because the Apple Agency Agreement’s MFN clause would require Penguin to
match on the iBookstore any lower price that was set on Amazon under wholesale, resulting in
Penguin making less money per unit. Timothy McCall Dep. 126:24-127:20.
125. The other publishers reached an identical conclusion. Mr. Nourry testified that the
presence of the MFN clause meant that “everyone” would have to be “under agency agreement.”
Arnaud Nourry Dep. 148:13-149:2. And Ms. Reidy wrote to Mr. Moonves that “[t]he Apple
ITunes eBook store will go live around the end of March (exact date not yet determined). In
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order not to be in a situation whereby we must price our adult new release eBooks sold through
Apple at $9.99, undercutting one of the reasons for making the deal, we need to change our
eBook selling terms with our other eRetailers before that date.” PX-0341 at 1.
126. In turn, moving Amazon and other retailers to agency meant that the publishers would be
able to take control of pricing decisions and would be able to raise e-book prices and restrain
retail e-book price competition. As Penguin’s Mr. McCall wrote: “Agency is anti-pricewar
territory. We don’t need to compete with other publishers on the price of our books.” PX-0317.
A Macmillan analysis concluded that the agency model will “drive up prices on branded,
differentiated” e-books. PX-0320 at 1. In contrast, if the publishers did not move Amazon and
other retailers to agency, and Amazon continued its low prices, “Apple would be entitled to
match that price and if Apple matched that price” the publishers “wouldn’t have been able to
afford the loss of margin.” Penguin (Timothy McCall) Dep. 125:13-126:24.
127. The MFN clause was the fundamental mechanism by which Apple ensured that Publisher
Defendants followed through on their agreed-upon goal of raising prices by eliminating
Amazon’s retail pricing authority. It did so in two ways, which the analyses of Professors
Gilbert and Baker illuminate. First, the MFN cemented each publisher’s belief that the other
Publisher Defendants would move uniformly to convert all other retailers to an agency model.
Accordingly, Professor Gilbert finds that as an economic matter, the MFN allowed each
publisher credibly to commit to this goal of shifting the industry to agency. Gilbert Direct ¶¶ 95,
98 (“[I]t would have been obvious to each defendant publisher that the MFNs created symmetric
incentives for other defendant publishers to export agency to all other e-retailers as well.”); see
also Baker Direct ¶ 74 (“Apple’s iBookstore launch offered each publisher a vehicle for
understanding that each of the other defendant publishers had the same financial incentive to
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adopt an agency distribution model agreement with Amazon and, consequently, for reaching a
common understanding that all the publishers would do so.”). Second, the MFN served as a
punishment mechanism for any publisher that would deviate unilaterally from this goal and keep
Amazon on a wholesale model. Baker Direct ¶¶ 72, 89-93 (“Because the publisher’s profits are
higher in the first of these settings—in which Amazon is on the wholesale model absent the
Apple MFN—than in the second—in which Amazon is on the wholesale model and the Apple
distribution agreement contains an MFN—the MFN penalized a publisher for keeping Amazon
on the wholesale model. For that reason, the Apple MFN strengthened publisher incentives to
follow through on a common understanding to convert Amazon to the agency model.”). Such a
publisher would incur a profit loss on all sales at Apple because the MFN requires that prices be
as low as at any other retailer, such as would prevail at Amazon on a wholesale model. Gilbert
Direct ¶¶ 96, 97; see also Baker Direct ¶ 78 (“[T]he MFN sharpened a publisher’s incentive to
convert Amazon because it effectively penalized a publisher for not doing so.”).
128. Apple has suggested that the MFN simply was designed to allow Apple to offer lower
prices in the iBookstore if Amazon or others continued their low pricing. But that argument
ignores the reality—which Publisher Defendants had made clear to Apple—that the last thing
Publisher Defendants wanted was to see Amazon’s $9.99 pricing not only continue, but extend to
Apple. As Mr. Nourry testified, his “entire vision was to prevent” $9.99 pricing “by putting
either agency agreements or wholesale on windowed titles. So yes, in theory that would have
been possible, but my intention was to make sure that this would not happen.” Arnaud Nourry
Dep. 233:11-20. Indeed, Publisher Defendants concede that the Apple MFN “heavily
incentivized” the publishers to “attempt to move to the agency model with Amazon and other
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retailers.” Mem. of Law in Supp. of Publisher Defs.’ Mot. Dismiss Consolidated Am. Class
Action Compl., at 27, Mar. 2, 2012 (Case No. 1:11-md-02293-DLC, Docket No. 89).31
129. It is utterly implausible that Apple was unaware of the consequences of what it was
proposing. As Mr. Nourry testified, one need not be “a lawyer” to understand that the publishers
could not comply with the Apple MFN clause “unless everyone is under agency agreement.”
Arnaud Nourry Dep. 148:13-149:2.
B. Apple’s Initial Written Proposal Included “Price Caps” That Would Function as
Fixed Prices for Publisher Defendants’ E-books
130.
The price caps were, in reality, an agreement among Publisher Defendants and Apple to
fix the retail prices of e-books at higher prices than Amazon was charging. The publishers
recognized that Apple’s price caps meant that “price would be standard across the industry.”
PX-0308 at 1. In economic terms, the price caps were “focal (natural and obvious)” and
provided “a basis by which the publishers reached a common understanding as to price levels.”
Baker Direct ¶ 104. Mr. Zaffiris of HarperCollins identified as a benefit of moving to agency
that it would mean “uniform prices” for e-books and a “once-in-a-lifetime chance to flip the
model.” PX-0307 at 2 (HC-DOJ-0149469). Indeed, the whole concept of the caps, when
coupled with the move to agency, was that “people all have the same prices.” Arnaud Nourry
Dep. 164:3-17.
131. Because the move to agency meant that the publishers would make less on each e-book,
Genevieve Shore Dep. 299:18-300:20, both Apple and the publishers knew that the publishers
would price the vast majority of e-books at the maximum agreed-upon price—a price that the
31 See also PX-0341 at 1-2; PX-0106 at 1; Penguin (Timothy McCall) Dep. 125:13-126:24.
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publishers all knew was the same for each of them. See, e.g., PX-0030; PX-0023 at 1-3;
PX-0612 at 3 (SS00032649); PX-0156 at 1. Moreover, because Publisher Defendants and Apple
expected the price caps would be binding, they understood the MFN would have its desired
effect of getting the publishers to move as a united front in converting Amazon to agency.
132. Mr. Cue was not only aware that the publishers wanted to raise e-book prices, but he
specifically touted the Apple Agency Agreements to the publishers as the “best chance for
publishers to challenge the 9.99 price point.” Arnaud Nourry Dep. 140:5-14. Mr.
Hely-Hutchison testified that agency was intended precisely so that prices of bestsellers would
rise to the price cap. Timothy Hely-Hutchinson Dep. 167:21-168:9; see also Penguin (David
Shanks) Dep. 123:17-124:14.
C. Apple Agreed to Higher Price Tiers
133. Consistent with their collective commitment to raise retail e-book prices, each Publisher
Defendant conveyed to Apple that the price caps should be higher than Apple had proposed.32
When Apple ultimately agreed to higher price tiers as sought by Publisher Defendants, it knew
that Publisher Defendants would price at the “caps” and thus that it was agreeing to increase
retail prices. See Eddy Cue Dep. 278:5-279:2.
134. Acting as an information conduit in such a manner as to increase the likelihood that each
Publisher Defendant ultimately would set its prices at (rather than below) the caps negotiated,
Apple told Publisher Defendants that each publisher shared the same reaction to Apple’s initial
proposal for price caps. Simon & Schuster CEO Ms. Reidy reported to her parent corporation’s
32 PX-0049 at 1; PX-0484 at 1; PX-0076; PX-0026; PX-0174 at 1.
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CEO that Apple’s Keith Moerer told her on January 8 that “what we said to him was exactly
what all the other publishers had said: the pricing was too low.” PX-0537; see also Timothy
McCall Dep. 76:24-77:4.
135. On January 13, 2010, Apple planned to meet with executives from Simon & Schuster,
Random House, and Macmillan. PX-0026. That morning, executives from Simon & Schuster,
Penguin, and Hachette met to discuss an e-book joint venture, but likely also to discuss how best
to engage with Apple. PX-0103; David Shanks Dep. 228:21-233:2.
136. Apple relented in meetings later that day and agreed it would increase the price caps.
From her January 13 meeting with Apple, Ms. Reidy came away believing “that there will be
some movement on . . . the question[] of pricing . . . .” PX-0656. And in a January 15, 2010
call, Apple’s Mr. Moerer told Madeline McIntosh and Amanda Close of Random House that
Apple was “examining and refining the model to allow more flexibility and high price tiers
now.” PX-0192 at 1.
137. On Saturday January 16, 2010, Apple’s Mr. Cue sent a series of nearly identical e-mails
to his publisher contacts. In those e-mails, Mr. Cue formally agreed to Publisher Defendants’
request for higher price caps: “This gives you significantly more tiers and higher prices.”33
Mr. Cue also used language to make clear both that Apple was negotiating a single deal with the
group of publishers and that each Publisher Defendant would receive the January 16 e-mail:
“one question we have been asked is whether we would take less than a 30% commission.” See
supra note 33. Indeed, leading off her description of the e-mail, Simon & Schuster’s Ms. Reidy
noted: “Last night I received an email I assume went to everyone.” PX-0537.
33 PX-0059 at 1; PX-0511 at 1; PX-0512 at 1; PX-0120 at 1; PX-0513 at 1.
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138. Before offering Publisher Defendants these “higher prices,” Mr. Cue sought permission
from Mr. Jobs, explaining: “Here is the pricing I think will push them to the very edge and still
have a credible offering in the market.” PX-0055. After composing many drafts of an e-mail
response, Mr. Jobs settled on: “I can live with this, as long as they move Amazon to the agent
model too for new releases for the first year. If they don’t, I’m not sure we can be competitive.”
Id. In some earlier drafts of his e-mail, Mr. Jobs included an MFN condition instead of the
“move Amazon to the agent model” condition, demonstrating the equivalence in his mind of the
two.34
D. Apple Pushes Publisher Defendants Forward as Amazon Offers Better Deal to
Authors
139. On January 18, 2010, Laura Porco, Amazon’s Director of Kindle Books, met with her
friend and former colleague, Madeline McIntosh of Random House. In the meeting,
Ms. McIntosh told Ms. Porco that she was under pressure from other “Big Six” publishers for
Random House to move to the agency model because Apple had made it clear that they wanted
maximum participation before it would open its iBookstore. Porco Direct ¶¶ 12-13.
140. On January 20, 2010, Amazon unveiled a new option in its self-publishing program under
which copyright holders could take their e-books directly to Amazon—cutting out the publishers
entirely—and receive royalties of up to 70 percent, far in excess of what the publishers offered.
PX-0706. Penguin CEO David Shanks summed up the publisher reaction: “On Apple I am now
more convinced that we need a viable alternative to Amazon or this nonsense will continue and
get much worse.” PX-0713. Rupert Murdoch, the CEO of HarperCollins’s parent company, was
34 See PX-0195; PX-0686; PX-0687; PX-0688.
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described by Mr. Murray as reacting to the news by becoming “pissed at Amazon” and wanting
to “screw Amazon.” PX-0714 at 1.
141. Apple knew that the publishers were trying to formulate a joint response to Amazon and
that Apple could help them do so. As Mr. Cue commented to Mr. Jobs on January 21 when
discussing Publisher Defendants’ willingness to agree to agency: “In the end, they want us and
see the opportunity we give them but they’re scared to commit! It [has] less to do with the terms
and more about the dramatic business change for them. . . . They just have to get some balls.”
PX-0042 at 1. Mr. Cue understood that one of Publisher Defendants’ greatest fears was having
to face Amazon alone, so he assured each of the Publisher Defendants that “they weren’t going
to be alone, so that I would take the fear away of the Amazon retribution that they were all afraid
of.” Eddy Cue Dep. 129:25-130:11.
1. Apple’s Eddy Cue Tells Macmillan CEO John Sargent over Dinner on January
20, 2010 that Macmillan Must Move Amazon to Agency
142. On January 20, 2010, Macmillan CEO Mr. Sargent met with Mr. Grandinetti of Amazon.
At that meeting, Mr. Sargent “indicated that he was working on an agency model but his plan
was to offer both an agency and reseller model.” PX-0482 at 3 (AMZN-MDL-0161086).
143. That same evening, on January 20, Mr. Sargent had dinner with Mr. Cue. PX-0037.
Before that dinner, Mr. Cue told Mr. Sargent that, while he was “very reasonable to try new
things,” they would have to work for the whole group: “we need to establish a starting point for
everyone.” PX-0712.
144. The morning after their dinner, Mr. Sargent wrote to Mr. Cue about Macmillan’s position
with respect to Apple’s agency offer. PX-0037 at 1. Mr. Sargent explained that Macmillan was
“willing to give up on many . . . points,” but that “[t]he stumbling block is the single large issue
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that we clearly had a misunderstanding about.” Id. Mr. Cue did not budge in his response: “I
understand. I don’t believe we are asking you to do anything, you haven’t told us you are doing.
We are just trying to get a commitment.” Id.
145. Later on January 21, Mr. Sargent telephoned Mr. Grandinetti to explain that he had
realized that the “Apple contract required him to only offer the agency model.” PX-0482 at 3
(AMZN-MDL-0161086).
146. The plain inference from this sequence of events and Mr. Sargent’s abrupt reversal of his
statement that he would offer Amazon both an agency and a reseller model is that Mr. Cue
reaffirmed to Mr. Sargent over dinner that Amazon had to be moved to agency. In doing so, Mr.
Cue was acting consistent with his January 4 and 5 emails in which Apple insisted that “all
resellers of new titles need to be in agency model.” PX-0476 at 1.
2. Apple Herds the Cats
147. The morning of January 21, Simon & Schuster CEO Carolyn Reidy e-mailed Mr. Cue
promising to call him and requesting information regarding Apple’s negotiations with the other
Publisher Defendants: “I will also look forward to an update on your progress in herding us
cats.” PX-0782 at 1. Ms. Reidy called Mr. Cue at 12:24 P.M. and spoke to him for
approximately eleven minutes. PX-0788 at 4.
148. Later on January 21, Mr. Cue sent e-mails to both Penguin CEO David Shanks and
Macmillan CEO John Sargent stating: “We completed our first deal and are very close with two
other publishers.” PX-0018; PX-0084.
149. The same day, there were upwards of 25 calls to one another placed between Publisher
Defendants’ CEOs. PX-0787 at 2-3. The logical inference is that each of the CEOs was
confirming Cue’s assurances about Publisher Defendant participation in the conspiracy.
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executive observed that as Apple’s self-imposed deadline for opening the iBookstore grew
nearer, Apple put “pressure” on the publishers by “letting [us] know they want 5 out the [sic] 6
. . . .” PX-0707 at 1. Another publishing executive described Apple as “demanding that all
publishers be in the program . . . .” PX-0303 at 2-3 (STATE-DOJ-00001281-282). Apple also
was careful to assure each publisher that its agreement would be same as that of the other major
publishers. Apple (Eddy Cue) Dep. (Mar. 13, 2013), 300:3-13; Apple (Eddy Cue) Dep. (Mar.
12, 2013), 127:21-128:22; Kevin Saul Dep. (Feb. 22, 2013), 172:3-173:2; PX-0509.
155. Each Publisher Defendant responded to Apple’s pressure by seeking additional
information about where Apple stood in its discussions with other publishers. This was
information Publisher Defendants needed to know to be certain that they could successfully
apply sufficient pressure on Amazon to change to an agency model. Apple willingly obliged by
sharing this information with Publisher Defendants. Arnaud Nourry Dep. 151:3-152:5. On
January 21, 2010, Mr. Cue e-mailed Mr. Sargent to inform him that Apple had already agreed to
agency terms with one publisher and was “very close with two other publishers.” PX-0084.
Two minutes later, Mr. Cue sent a substantively identical e-mail to Penguin’s Mr. Shanks. PX-
0018.
156. On January 22, 2010, Macmillan agreed in principle to the agency deal with Apple.
Apple then told Macmillan that it was the “third to say yes” and that Apple had “decided they
can go forward with the i[book]store at this level of support.” PX-0089. Mr. Cue had sent a
similar message to Mr. Young earlier that afternoon, PX-0563, which had its desired effect.
When Mr. Young forwarded that email to Mr. Nourry, it clearly piqued the latter’s attention and
Mr. Nourry responded: “We really need to know about the others!” PX-0563.
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157. Hachette’s willingness to agree to agency was based expressly on where Apple’s
negotiations stood with Hachette’s competitors. On January 21, Mr. Young reported to Mr.
Nourry on what he had learned from Eddy Cue as to the status of the agency negotiations.
PX-0562 at 1. Mr. Cue apparently reported that “one major publisher (clearly RH) was out and
that ne [sic] need the five majors in but maybe four.” Because Random House had just informed
Apple that same day that it would not sign an agency agreement with Apple,35
PX-0042 at 2
(APLEBOOK-00016370), Mr. Young had to have spoken to Mr. Cue on January 21.
158. Mr. Nourry responded that Mr. Young should see if he could find out something from his
“great PR fan.” PX-0562 at 1. An e-mail from the previous day establishes that Mr. Nourry’s
“fan” was Simon & Schuster’s CEO Ms. Reidy. PX-0711 at 1. Specifically, Mr. Nourry wanted
information on Simon & Schuster’s plans because Mr. Nourry was “reluctant to fixing best seller
prices at 12$90 because it may be our last chance to bring it back up to say 14$99.” PX-0562 at
1. Mr. Young replied to Mr. Nourry that he was off to a meeting of the Association of American
Publishers where he would “try and discover what is going on.” PX-0715. Mr. Young will
testify that he wanted this information in part to determine whether the information he was
receiving from Eddy Cue about other publishers was accurate. Mr. Sargent is likely to testify
that he spoke to Mr. Young and Mr. Murray at the AAP meeting, and that they acknowledged
they were having a “tough week” with Apple.
159. Hachette was the first publisher to actually sign an Apple Agency Agreement on January
24. PX-0001. Mr. Young will likely testify that it was a great comfort to know that Hachette
35
Random House executives will testify that moving to agency would have been too dramatic of a shift in the company’s business model to make that quickly.
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would not be alone in signing up with Apple, as Mr. Young knew that Macmillan had already
verbally agreed to Apple’s terms. PX-0539. As Mr. Nourry of Hachette wrote that same day,
once he was assured that other publishers would be participating in the conspiracy, “moving to
the agency model will put an end to price deflation and help several players to remain in the
game. We do not like the 12,90 price point, but it is much better than 9,99 and moving back to
say 14,90 would help Amazon in their communication to customers.” PX-0106 at 1; Arnaud
Nourry Dep. 179:11-180:4.
160. Penguin’s agreement to Apple’s terms was conditioned expressly on the agreement of its
competitors to Apple’s terms. PX-0018. As Mr. Cue testified: “Penguin, and David in
particular of all the publishers, was the most concerned about sort of not being alone or being
one of two.” Eddy Cue Dep. 344:5-345:4. Indeed, Penguin’s Mr. Shanks told Mr. Cue that he
would not agree to agency unless at least three of the other publishers did so as well. Penguin
(David Shanks) CID Dep. 86:15-24; PX-0029. On the evening of Friday, January 22, 2010, Mr.
Cue e-mailed his boss, Mr. Jobs, and noted that Mr. Shanks “wants an assurance that he is 1 of 4
before signing.” PX-0028 at 1.
161. On January 22, 2010, Mr. Shanks asked Mr. Cue if he had “any more of the big six
confirmed yet.” PX-0018. Five minutes later Mr. Cue called Mr. Shanks. PX-0788 at 5. Later
that day, Mr. Shanks told Mr. Cue that, on “orders from London,” Apple had to “have the fourth
major or we can’t be in the announcement.” Mr. Cue responded, “Hopefully this is not an issue
but if it is I will call you at 4pm. It would be a huge mistake to miss this if we have 3.”
PX-0029.
162. On January 24 and 25, 2010, Mr. Shanks had repeated calls with Mr. Cue: a nearly two-
minute call on Sunday, January 24, 2010, and three calls of twenty, five and a half, and one and a
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half minutes on the morning of January 25, 2010. Eddy Cue Dep. 352:9-17; PX-0788 at 6. On
the morning of January 25, 2010, Mr. Shanks had a four-minute telephone conversation with Ms.
Reidy.36
PX-0787 at 4. Through Mr. Shanks’ repeated calls with Mr. Cue and his call with Ms.
Reidy, Mr. Shanks must have received the assurances he needed, as Penguin signed the Apple
Agency Agreement on January 25, 2010. PX-0002.
163. In total, three other publishers—Simon & Schuster, Macmillan, and Penguin—signed
Apple Agency Agreements on January 25.37
164. At this point, HarperCollins remained a holdout, largely because, as Mr. Murray will
testify, HarperCollins believed the retail prices of e-books in Apple’s proposal remained too low
and would deliver long-term damage to HarperCollins’s business. HarperCollins’s executives
recognized, though, that the effect of the publishers moving to agency would be that Apple
would monitor and enforce the price-fixing agreement. PX-0308 at 1-2 (stating that under the
agency agreements “Apple would control price and that price would be standard across the
industry” and observing that Apple would become the “gatekeeper” on e-book prices for the
industry).
165. Once he had secured the verbal agreement of Simon & Schuster, Hachette, Macmillan,
and Penguin, Mr. Cue wrote Mr. Murray to inform him that four publishers had agreed to
Apple’s agency agreements. PX-0507.
36
Mr. Shanks was unable to recall the substance of that conversation. David Shanks Dep.241:13-242:3.
37PX-0004 (Simon & Schuster /Apple Agency Agreement); PX-0002 (Penguin/Apple Agency
Agreement); PX-0003 (Macmillan/Apple Agency Agreement).
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166. Before making a final decision on signing with Apple, Mr. Murray made a round of
phone calls to his fellow publisher CEOs. Mr. Murray first called Mr. Sargent at Macmillan to
tell him that HarperCollins would not sign the Apple contracts. Mr. Sargent will testify that this
communication by Mr. Murray, a competitor of Mr. Sargent’s, was “inappropriate.” As Mr.
Murray will testify, however, Mr. Sargent nonetheless confirmed for Mr. Murray that Macmillan
would participate in the iBookstore launch. Two minutes before calling Mr. Sargent, Mr.
Murray had called Mr. Young. While it does not appear that Mr. Murray was able to reach him,
PX-0787 at 3, Mr. Murray will testify that he did confirm with Hachette that it would participate
in the iBookstore launch. A little more than an hour after Mr. Murray called Mr. Sargent, Mr.
Sargent called both Ms. Reidy and Mr. Young. Id.
167. At the request of Mr. Cue, Mr. Jobs went over Mr. Murray’s head to HarperCollins’s
parent, News Corp., to secure HarperCollins’s participation in the conspiracy. Specifically, Mr.
Cue requested that Mr. Jobs call James Murdoch and “tell him we have 3 signed so there is no
leap of faith here.” PX-0030.
168. In convincing News Corp., Mr. Jobs demonstrated that Apple knew it was conspiring
with the Publisher Defendants to restrain retail price competition, thereby fixing higher e-book
prices. Mr. Jobs acceded to Mr. Cue’s request and wrote to James Murdoch on January 24,
2010, urging HarperCollins to “[t]hrow in with Apple and see if we can all make a go of this to
create a real mainstream ebooks market at $12.99 and $14.99,” rather than at $9.99 with
Amazon. PX-0032 at 1. That is to say, Mr. Jobs told Mr. Murdoch that the price for e-books in
the iBookstore would be fixed at the price caps in the substantively identical Apple Agency
Agreements.
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169. Mr. Jobs did not stop there. He told Mr. Murdoch: “All the major publishers tell us that
Amazon’s $9.99 price for new releases is eroding the value perception of their products in
customer’s [sic] minds, and they do not want this practice to continue for new releases.”
PX-0032 at 3 (APLEBOOK-03345080). Mr. Jobs also made clear to Mr. Murdoch that the price
caps would be the actual prices charged in the iBookstore: He referred in his e-mail to the
publishers’ revenue per book sold being “around $9 per new release,” a figure that Mr. Jobs
could state with certainty only because he knew that the publishers would be pricing at the caps.
PX-0032 at 5 (APLEBOOK-03345082). Thus, whatever else Apple may contend about its level
of interest in raising e-book prices, it certainly knew that prices would increase as a result of its
conspiracy with the publishers.
170. Mr. Jobs’s message proved persuasive. On January 26, 2010, Apple and HarperCollins
signed an agreement for Apple to distribute HarperCollins’s e-books through an agency model.
PX-0005.
F.
The Conspiracy Benefited Apple by Allowing Apple to Earn a 30% CommissionWithout Needing to Compete Against Amazon on Price
171. Having thus reached agreement, at the iPad’s launch on January 27, Mr. Jobs was able
confidently to respond to Wall Street Journal reporter Walt Mossberg’s question about why
customers would pay higher prices for e-books sold in the iBookstore when they could get the
same titles from Amazon for less: “The prices will be the same.”38
PX-0615. Mr. Jobs’s
38
In a nearly identical communication two days later, Simon & Schuster executivesdemonstrated that they also understood the terms of the Apple Agency Agreement would mean itwould have to prevent Amazon from selling its bestseller e-books at $9.99. In response to ane-mail asking, “If I can still buy an ebook from amazon at 9.99 and read on the ipad, how does
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all of their new release e-books to the agency model and that they had already reached an
agreement with Apple. PX-0728.
X. APPLE’S ASSURANCES OF COMMON ACTION GAVE PUBLISHER
DEFENDANTS THE NECESSARY CONFIDENCE THAT THEY WERE NOT
ACTING ALONE175. Publisher Defendants all signed Apple’s agency contracts within three days of one
another. The terms of the Apple Agency Agreements were materially identical for each
Publisher Defendant, a fact that Apple made sure to convey to the publishers. For example, Mr.
Cue told Mr. Murray “that we were going to treat them, you know, in a very similar thing -- very
similar position around all the key points.” Eddy Cue Dep. 300:3-13.
176. Publisher Defendants were also well aware that moving to agency with Apple was
against their short-term individual economic interest. Any publisher that moved to agency alone
would sell newly-released and bestselling e-books at higher prices than its competitors, thus
losing market share.39
Worse, the publisher would earn less revenue (net of commission) on
every e-book sold.40 But more importantly, and as Apple recognized, any single publisher that
tried to force Amazon to accept the agency model would have credibly faced retaliation from
Amazon. Apple (Eddy Cue) CID Dep. 52:19-53:22 (testifying that Apple was aware that
publishers were concerned about signing on to the agency model alone because it would open
them up to “significant repercussions” from Amazon); Eddy Cue Dep. 336:8-21 (Mr. Cue
39 Gilbert Direct ¶ 61.
40Gilbert Direct ¶ 76; PX-0506 (Jan. 20, 2010 e-mail from Robert Zaffiris to Charlie Redmayne,
citing a “profit hit for switching to the agency model” of “about $3.5M in revenues on $20M or 17%”); PX-0719 (Jan. 23, 2010 email from Coram Williams to John Makinson forwardinganalysis showing a switch to agency would result in a negative “$4.5 m net profit impact” onPenguin’s fiscal 2010 budget).
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PX-0101 at 1; see also Grandinetti Direct ¶ 45. Mr. Sargent continued by expressing the
publishers’ view of the future of the publishing industry using the classic language of cartels:
expressing a hope for pricing that was “stable and rational” and stating that Macmillan was
willing to “make less money” in the short term to achieve that goal. PX-0101 at 2
(APLEBOOK-03345033). Mr. Sargent used nearly identical language in a February 4 blog post,
writing:
Over the last few years we have been deeply concerned about the pricing of electronic books. That pricing, combined with the traditional business model wewere using, was creating a market that we believe was fundamentally unbalanced.In the last three weeks, from a standing start, we have moved to a new businessmodel. We will make less money on the sale of ebooks, but we will have a stableand rational market.
PX-0470 at 1. Mr. Sargent also forwarded Mr. Cue his letter regarding the Amazon dispute
“[j]ust to make sure you are in the loop.” Mr. Cue then forwarded Mr. Sargent’s letter to Mr.
Jobs, who responded, “Good email.” PX-0101 at 1. That same day, Mr. Sargent sent Mr. Cue
an e-mail (subject line: “URGENT!!”) seeking Mr. Cue’s counsel: “Hi Eddy. I am gonna need
to figure out our final agency terms of sale tonight. Can you call me please?” Mr. Cue replied,
“I just tried. Call me on my cell . . . .” PX-0053.
185. As CEO of the smallest of the publishers, Mr. Sargent will testify that he knew
Macmillan would have been unable to force Amazon’s hand alone.42 Mr. Sargent could only
have made the threats to Amazon if he knew that other publishers were prepared to make the
same threat. Mr. Sargent was able to go forward with his threats to Amazon because, as he will
42 Penguin similarly knew it could not move Amazon to the agency model alone. See Penguin(Timothy McCall) Dep. 233:2-16 (testifying that if Penguin had attempted to move Amazon toan agency model by itself, Amazon would not have agreed).
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testify, he had no doubt that the other Publisher Defendants would deliver a similar message to
Amazon. Mr. Sargent admitted precisely that: “[T]he deal that 5 of us did with Apple meant
someone was gonna have to do it. Just luck of the draw that it was me. . . . The optics make it
look like I stood alone, but in the end I had no doubt that the others would eventually follow.”
PX-0094 at 1.
186. On Sunday, January 31, 2010, Mr. Nourry of Hachette Livre e-mailed Mr. Sargent that “I
can ensure you that you are not going to find your company alone in the battle.” PX-0091. Mr.
Nourry testified that the purpose of his e-mail to Mr. Sargent was that “those who had signed”
with Apple and were “now having to face other retailers to sign the agency agreement . . . would
have to follow the same difficult path of negotiating with Amazon.” Arnaud Nourry Dep.
200:18-201:17. Jennifer Walsh of the William Morris literary agency then e-mailed Mr. Nourry,
writing that Macmillan had “punch[ed] the bully in the nose in front of the whole school yard.
Now you can bring in the cavalry and make new alliances that will preserve our business.”
PX-0191 (emphasis added).
187. Other Publisher Defendants also expressed their support to Macmillan in its battle with
Amazon. For example, Mr. Makinson of Penguin wrote Mr. Sargent on February 2, 2010: “Just
to say that I’m full of admiration for your articulation of Macmillan’s position on this. Bravo.”
PX-0075.
188. Mr. Nourry had written to Mr. Young on January 31 that he wanted to “enter in the battle
as soon as possible” and that he was “thrilled to know how A will react against 3 or 4 of the big
guys.” PX-0730 at 1. Mr. Nourry testified that he wanted to join the battle to bolster Macmillan
and force Amazon to “negotiate in a much weaker position than they like to be in.” Arnaud
Nourry Dep. 206:5-207:6. After Hachette actually delivered its ultimatum to Amazon, Hachette
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executives celebrated the message’s effect, noting that on February 1, 2010, “Amazon’s stock is
down 9%!” PX-0187. The subject line of the email was “Now it must really hurt…” Id.
189. Over the next few weeks, the other Publisher Defendants also told Amazon that it could
either switch to the agency model or lose new release e-books for a significant period. Naggar
Direct ¶¶ 27-28; Porco Direct ¶ 16. It is implausible that the five Publisher Defendants all could
have independently reached a decision to make essentially the same threat to Amazon. Tellingly,
Publisher Defendants’ internal analyses show that moving to agency was not unilaterally
profitable and thus only made sense in the context of collective action. PX-0506 (Jan. 20, 2010
e-mail from Robert Zaffiris to Charlie Redmayne, citing a “profit hit for switching to the agency
model” of “about $3.5M in revenues on $20M or 17%”); PX-0719 at 1 (Jan. 23, 2010 email from
Coram Williams to John Makinson forwarding analysis showing a switch to agency would result
in a negative “$4.5 m net profit impact” on Penguin’s fiscal 2010 budget). It is reasonable to
infer, therefore, that Publisher Defendants knew that most of their closest competitors would
increase prices, rather than try to undercut the price increases and capture diverted sales. And it
is certainly reasonable to believe that Apple knew the same.
190. As Ms. Reidy will admit at trial, without an agreement among the publishers, facilitated
by Apple, Amazon would have ignored any one publisher’s request to go to agency, and that
publisher would then have been forced to lower prices in the iBookstore because of the Apple
price MFN. This was unacceptable to Publisher Defendants. Thus, they made certain that
Amazon understood that all five Publisher Defendants were united in seeking agency
agreements.
191. Amazon heard Publisher Defendants’ message loud and clear. As Mr. Grandinetti
testified: “it was highly likely that we would lose ebooks from those publishers unless we
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PX-0605 at 1. It also was clear to Amazon that Publisher Defendants were going to raise prices
to consumers. Grandinetti Direct ¶¶ 39, 48.
194. In the span of two months, four of the five Publisher Defendants moved Amazon to
agency. Naggar Direct ¶¶ 31-33.43 Penguin was the final Publisher Defendant to move Amazon
to agency pricing in May of 2010 because of certain terms in its existing agreement with
Amazon. Penguin (David Shanks) CID Dep. 114:11-117:21. Even then, Penguin was able to
force Amazon to move to agency earlier than planned by stopping the addition of new e-books to
the Kindle store beginning on April 1, 2010. The effect of this measure was to make every new
Penguin release available in all other digital bookstores except Amazon’s. Grandinetti Direct
¶ 50; Naggar Direct ¶ 33.
195. Publisher Defendants quickly transitioned to substantially similar agency agreements
with their other e-retailers as well, eliminating any retail price competition on e-books.44 For
example, Google, which had been prepared to and preferred to sell e-books on a wholesale
model, accepted Publisher Defendants’ collective agency demand given the percentage of
popular e-books those publishers controlled. Turvey Direct ¶¶ 3-5. In conversations with
Google, Publisher Defendants conveyed that it was their agreements with Apple that made them
unwilling to enter into a non-agency agreement with Google. Turvey Direct ¶ 3.
43 See also PX-0016 (Feb. 5, 2010 Amazon/Macmillan agency agreement); PX-0017 (Mar. 23,2010 Amazon/HarperCollins agency agreement); PX-0014 (Mar. 23, 2010 Amazon/Simon &Schuster agency agreement); PX-0013 (Mar. 31, 2010 Amazon/Hachette agency agreement);PX-0015 (June 3, 2010 Amazon/Penguin agency agreement).
44With Barnes & Noble, see PX-0007; PX-0008; PX-0009; PX-0010; PX-0011. With Sony, see,
e.g., PX-0494; PX-0495; PX-0497; PX-0498. With Kobo, see, e.g., PX-0493; PX-0496.
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continued to discount the trade ebooks sold by other publishers, that outcome would have done
little to address its concerns, or the shared concerns of the defendant publishers as a group.”).
Without any assurance that other publishers would move similarly, no rational publisher could be
expected to accept Apple’s retail price MFN, which effectively committed Publisher Defendants
to their plan to convert Amazon and all other e-book retailers to the agency model. Once Apple
had assured Publisher Defendants of coordinated movement, however, their resistance to the
MFN largely faded away.
XIII. APPLE AND PUBLISHER DEFENDANTS PRESSURED RANDOM HOUSE TO
JOIN THEM IN SIGNING AGENCY AGREEMENTS
199. Random House greatly benefitted from its refusal to join Publisher Defendants in their
conspiracy with Apple. This fact further proves that Publisher Defendants were engaging in
behavior that, had they been acting independently, would have been against their economic self-
interest. As it did with other publishers that remained on wholesale terms, Amazon continued to
price Random House’s newly-released and bestselling e-books at $9.99, Naggar Direct ¶ 39,
which increased Random House’s sales volume and market share. PX-0765 at 14 (RH-MDL-
00026705).
200. Apple was not content to stop with only five of the six biggest publishers. Bringing in
the last remaining large publisher not on agency was key to consolidating the conspiracy’s
achievements because, as Mr. Cue wrote Tim Cook, “when we get Random House, it will be
over for everyone.” PX-0627 at 1.
201. Despite Random House offering Apple lower wholesale prices, Apple refused to allow
Random House’s e-books in the iBookstore unless Random House adopted the agency model.
PX-0516; PX-0528.
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XIV. THE CONSPIRACY AMONG APPLE AND PUBLISHER DEFENDANTS
ACHIEVED ITS COLLECTIVE GOALS OF RAISING E-BOOK PRICES AND
ENDING RETAIL PRICE COMPETITION
209. Almost immediately, the conspiracy had its intended effects. The evidence is
overwhelming that Publisher Defendants’ e-book prices rose after their move to an agency
pricing model. As Mr. Grandinetti testified, “[a]fter agency, consumers saw an immediate
double-digit percentage price increase on ebooks pretty much across the board. The higher
prices appeared not only on best-selling e-books, but even on backlist titles.” Grandinetti Direct
¶ 51. Even Defendants’ experts admit that prices rose, although they try their best to explain
away the data.
A. Prevailing Low E-book Prices Would Have Continued But For the Conspiracy
210. From the launch of its Kindle business until it was forced to adopt agency pricing terms
as a result of Defendants’ conspiracy, Amazon sold most new-release e-books and New York
Times bestsellers to consumers for $9.99. Grandinetti Direct ¶¶ 25, 27. Amazon’s approach to
pricing e-books was similar to the one it had long used in the sale of physical books: attractive
low pricing for the most popular titles, including the use of “loss leaders” where certain titles
were sold below cost, in order to stimulate purchases of other more profitable titles, thereby
maintaining a profitable e-books business overall. Grandinetti Direct ¶¶ 21, 25, 29-30; Naggar
Direct ¶¶ 11-12. Amazon’s Mr. Naggar “explained to the publishers that Amazon’s pricing
strategy was highly sustainable.” Naggar Direct ¶ 11. Mr. Grandinetti likewise testified that
loss-leading “is quite common in both book-selling and retailing generally” and “it’s common
that we might lose money on some print bestsellers and this has proven a very successful,
sustainable, and profitable approach.” Amazon applied this approach to its e-book business
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Table 3: The price caps in the Apple Agency Agreements
Gilbert Direct Table 3.
214. Apple and Publisher Defendants expected that as soon as their agency agreements went
into effect, the prices of their e-books would rise significantly as a result of setting prices at the
caps. See PX-0514 at 10 (p. 503) (Mr. Jobs told his biographer that Apple “told the publishers,
‘We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the
customer pays a little more, but that’s what you want anyway.’”); Apple (Eddy Cue) CID Dep.
42:7-43:17, 47:5-16 (“And so when we walked in and had the meeting, they certainly expressed
to us that they were not happy with books being sold at what they viewed as too low prices,
below the cost that they were doing it, and that they were not particularly interested in
empowering us to become just the same thing.”); Kevin Murphy Dep. 262:1-264:5; PX-0508 at
1.
215. Rupert Murdoch, CEO of HarperCollins’s parent company, News Corp., confirmed that
he knew retail prices would increase, stating on February 2, 2010:
Maximum price to customer
Hardcover
list price
New releases
NY Times Bestsellers
override caps
$20.01–$22.00 $9.99
$22.01–$24.00 $10.99
$24.01–$25.00 $11.99
$25.01–$27.50 $12.99
$27.51–$30.00 $14.99 $12.99
$30.01–$35.00 $16.99 $14.99
$35.01–$40.00 $19.99
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Table 5: Summary of E-book Price Increases at Amazon and Barnes & Noble by Defendant
Publishers from Shortly Before to Shortly After Agency
Amazon Weighted Average Price Increases
Publisher All eBooks New
Releases NYT
Bestsellers Backlist
Hachette 33.0% 14.1% 37.9% 37.5%HarperCollins 13.6% 12.5% 44.0% 15.2%Macmillan 11.6% 14.0% - 11.2%Penguin 18.3% 19.5% 43.6% 17.6%Simon & Schuster 18.0% 15.1% 28.7% 19.8%
DefendantPublishers 18.6% 14.2% 42.7% 19.6%
Random House 0.01% 1.9% 0.2% 0.3% Non-Majors -0.2% -0.9% 1.1% 0.1%
Barnes & Noble Weighted Average Price Increases
Publisher All eBooks New
Releases NYT
Bestsellers Backlist
Hachette 36.0% 16.5% 38.2% 34.4%HarperCollins 23.6% 42.5% 43.4% 18.2%Macmillan 11.3% 7.2% - 13.6%Penguin 14.4% 9.7% 9.3% 15.4%Simon & Schuster 20.0% 17.1% 30.0% 22.4%
DefendantPublishers 19.9% 19.0% 15.8% 19.5%
Random House -0.2% 0.5% 0.0% 1.2% Non-Majors 2.3% -3.1% 1.1% 3.7%
Gilbert Direct at Table 5.
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Gilbert Direct Figure 3.
221. As Professor Gilbert’s graph reproduced above illustrates, the first four Publisher
Defendants to move to agency with Amazon increased their prices in April 2010 when those
agreements went into effect. Penguin, which did not begin its agency relationship with Amazon
until late May, increased its prices substantially at that time, just as the others had done in the
prior month.
222. Professor Ashenfelter performed a regression analysis of Publisher Defendants’ trade
e-book retail prices during the six months before and after the agency transition. After
controlling for a wide variety of possible influences using a control group and fixed effects, he
found that these prices increased by 16.8%. Ashenfelter Direct ¶ 10.
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223. These effects were confirmed by Defendants’ expert, Dr. Burtis, who concluded “average
prices for Publisher Defendants’ eBooks increased—in varying amounts—in the period after”
the Apple Agency Agreements went into effect. PX-0831 at ¶ 25; PX-0832 at ¶ 35 (“The prices
of certain hardcover new releases and NYT bestsellers that are the focus of Plaintiffs’ price-
fixing allegations increased . . . .”); see also PX-0833 at ¶ 16 (Professor Rubinfeld recognizes
that “the initial effect of the move to an agency model was an initial increase in prices of best-
selling e-books.”).
224. Retailers who had been moved to agency observed these significant retail price increases
immediately after agency went into effect. As a Barnes & Noble presentation concluded, the
“[a]verage price rose as expected with agency pricing.” PX-0548 at 16 (BN00093265). Amazon
calculated that the average selling price of agency publishers’ e-books sold by Amazon increased
by $2, from $8.18 on March 31, 2010, when Amazon set the retail prices, to $10.18 on April 7,
2010, when Publisher Defendants set the retail prices. PX-0549 at 1-2. In the same period, the
average selling price of non-agency e-books increased by only 6 cents. Id. One executive at
Sony proposed the following language appear on the home page of its e-book store: “We
apologize for the increase in price on certain eBooks at the Reader Store. Unfortunately,
changes have recently occurred in the publishing industry affecting many eBook retailers which
require that we no longer provide discounts on the prices set by the publishers.” PX-0170. The
price increases also led Amazon to change its website page for each agency-price e-book with a
description, “This price was set by the publisher,” to inform customers that Amazon was not
responsible for raising prices. Grandinetti Direct ¶ 51.
225. Even though Defendants’ expert, Dr. Burtis, acknowledges these price increases
immediately following the move to agency, her analysis obfuscates these results. PX-0831 at
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for any individual title, and “assume[d]” for purposes of his calculations “that all of Amazon’s
below-cost sales in the pre-agency period occurred at cost.” PX-0833 at ¶ 190. This approach is
designed to understate actual consumer price increases and ignores the possibility that a loss on
one title could be made up by other incremental revenues. Naggar Direct ¶ 12. Professor
Rubinfeld also failed to explain why Amazon’s low pricing of e-books would not have continued
or why a multi-product firm such as Amazon must price every title above wholesale cost.
Gilbert Direct ¶ 166 n.123.
229. Publisher Defendants’ higher e-book prices were durable. Professor Gilbert found that
Publisher Defendants’ price increases lasted for at least a year. In fact, Publisher Defendants’
prices increased in the year starting February 2010 and ending February 2011 by 23.9% at
Amazon and by 19.3% at Barnes & Noble. Gilbert Direct ¶ 153 & Table 6. Defendants’ own
expert, Dr. Burtis, confirmed that the elevations in average prices of Publisher Defendants’ e-
books lasted for nearly two years following their move to agency. PX-0831 at Graph 1; see also
Ashenfelter Direct ¶ 53 (regression model yields a 24.6% price increase from February 2010
through February 2011).
230. Consistent with the evidence that the conspiracy caused material e-book price increases,
e-books began to be sold at a substantial discount once Publisher Defendants who reached a
settlement with the United States in this antitrust lawsuit negotiated new e-book agreements with
retailers pursuant to their consent decrees. See PX-0388; Turvey Direct ¶ 8.
D. The Apple Agency Agreements Harmed Consumers by Preventing Promotional
Competition Among Retailers.
231. For all the reasons described above, Publisher Defendants stripped e-book retailers not
only of the ability to compete directly on price, but also of the ability to offer discounts, rebates,
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bundles, rewards programs, or other promotions that could have the effect of softening the
effects on consumers of the higher agency prices. See, e.g., PX-0013 at 6 (HBG-HC-000006);
PX-0016 at 7 (MAC 0005598); PX-0014 at 13 (SS00027594); PX-0533 at 9-10 (GOGBKS-TT-
0015423-424); PX-0497 at 7 (SEL-CORP-0000074); Porco Direct ¶ 17; Turvey Direct ¶¶ 6-7.
232. That financial promotions would disappear at the same time higher agency prices arrived
was not lost on e-book retailers. For example, just days before the agency agreements went into
effect, Kobo offered its e-book customers “some great last minute promotions before they go
away,” including an extra $2 off every e-book. PX-0147 at 1 (forwarding Mar. 29, 2010 Kobo
Blog Post, “Countdown to Agency (and Party Like its $9.99!)”).
233. The promotional restrictions were part of the price-fixing conspiracy. As Macmillan
CEO John Sargent explained to Amazon’s Russell Grandinetti just a week after the iPad launch
event: “We can not budge on the final price that the consumers pay for our books. Not what is
listed, but what they actually pay. That is the very heart of the agency model, and it is why we
are doing this.” PX-0063.
234. Macmillan’s Fritz Foy similarly explained to Barnes & Noble’s Theresa Horner that a
promotion she had proposed would not be permitted because “[w]e worked hard to push the
price of our new Ebooks up just a few dollars – and this would immediately signal not an
increase in value – but a decrease in value.” PX-0315 at 1.
235. HarperCollins’s Leslie Hulse likewise conveyed to Kobo’s Michael Tamblyn: “A gift
card can NOT be used as a means to convey loyalty rewards” for e-book purchases. PX-0125 at
1 (emphasis in original). And Simon & Schuster quashed Kobo’s request to reward high volume
e-book buyers with “something non-book but lovely.” PX-0143 at 1-2.
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236. When Google proposed to Macmillan a promotion where a customer would “buy[] a
book at a normal price,” and Google would buy a second copy of the e-book to give to a friend
of the customer’s, Macmillan’s Mr. Foy responded that “answer as you suspected is NO.”
PX-0150 at 1 (emphasis in original).
237. These restrictions by Publisher Defendants had the effect of restraining competition by
e-book retailers not just to sell Publisher Defendants’ titles, but to promote digital reading
generally. As Kobo explained on its blog shortly before agency prices went into effect, “[w]e
lose most of our ability to issue coupons, promotions, special discounts, kickbacks, buy-X-get-
one-free. We could still do it for non-agency titles, but then we end up in a weird situation of
‘Get $1 off, but only on these books, and definitely not on these other ones.’ That’s not fun.
And worse, it’s confusing to consumers. We’re sad about that, obviously.” PX-0147 at 2
(SS0035587).
238. Amazon likewise found its innovative Kindle Owners’ Lending Library, which allows
Amazon Prime members to borrow one e-book per month free of charge, hobbled by its inability
to include any of Publisher Defendants’ e-books. Grandinetti Direct ¶ 56.
E. Higher Agency Prices Reduced E-book Sales
239. The Apple Agency Agreements suppressed e-book sales in two different ways. First,
some Publisher Defendants withheld e-books from retailers that had not signed agency
agreements prior to the shift to agency terms with Apple. PX-0449; see also PX-0163 at 1;
David Shanks Dep. 248:22-251:8. Second, consistent with fundamental expectations of
consumer behavior, the higher e-book prices that resulted from the conspiracy translated into
lower unit sales for Publisher Defendants. Gilbert Direct ¶ 71.
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point to consumer benefits that are not even tangentially related to the conspiracy, including the
introduction of the iPad or a drop in e-reader or other device prices.
252. Apple’s purported procompetitive justifications may have validity only “if they succeed
in increasing output, lowering price, or increasing quality.” Gilbert Direct ¶ 130; see also Baker
Direct ¶ 132. But e-book prices increased, output was lower than it would have been, and there
has been no demonstration of increases in quality of e-books tied to the Apple Agency
Agreements that would offset the significant price increases. See Gilbert Direct ¶¶ 130-31.
253. If the agency pricing model truly increased output by promoting e-book retailer efforts
and inter-brand competition, Publisher Defendants would have had unilateral incentives to move
independently to adopt agency pricing. Yet the evidence indicates that Publisher Defendants did
not find it in their unilateral interest to move to agency pricing without the participation of their
rivals. Gilbert Direct ¶ 131.
A. The Apple Agency Agreements Did Not Promote Competition for Complementary
Products Such as E-readers and Tablets
254. None of Defendants’ experts argues that the entry of the Apple iBookstore as an e-book
retailer generated consumer benefits from intensified inter-retailer price competition. Gilbert
Direct ¶ 276. By contrast, inter-retailer price competition before the Apple Agency Agreements
provided consumers with significantly lower e-book prices. Id .
255. The prices of consumer electronics tend to decrease with time, while their quality and
performance tend to increase with time. Gilbert Direct ¶¶ 247-48. There is no evidence that
e-reader devices have not simply followed this familiar path, much less that any deviation is the
result of the Apple Agency Agreements rather than device competition. See PX-0680; Baker
Direct ¶ 139 (“[N]one of defendants’ experts establish a causal connection between the
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introduction of the iBookstore and the competition among device manufacturers observed in the
period beginning in April 2010.”).
1. Lower Device Prices Are Not Attributable to Agency
256. Device competition may well have intensified as a result of Apple’s release of the iPad,
but that device “was going to be launched with or without a bookstore.” Apple (Keith Moerer)
Dep. 36:17-24. And some of the benefits Defendants would claim are not even attributable to
the iPad, much less to the iBookstore or the Apple Agency Agreements.
257. For example, Barnes & Noble’s “price reduction for nook was planned long before iPad.
It was not a reaction at all to the iPad’s success.” PX-0451; see also PX-0442 at 1 (February 15,
2010 email to others at Barnes & Noble regarding “Nook pricing,” explaining that “[t]he five
year plan assumed a reduction in the retail price as of the beginning of the fiscal year—May 1”).
258. Accordingly, Dr. Burtis’s observation that “since the agency agreements went into effect,
eBook retailers have introduced many new and innovative eReader devices and tablets at lower
prices,” PX-0831 at ¶ 32, is simply irrelevant. As with her observations on price and output, Dr.
Burtis has not attempted to isolate which, if any, innovations were caused by the Apple Agency
Agreements rather than the numerous other trends and events occurring concurrently in the
e-book industry and related industries. In particular, because she made no attempt to distinguish
the much more direct effect of the iPad’s entry from the effect of the iBookstore’s entry (which,
Apple’s post hoc protestations notwithstanding, may well have happened even if Publisher
Defendants had refused to deviate from their traditional wholesale sales model for e-books), her
speculation does not demonstrate that any device prices were reduced as a result of the Apple
Agency Agreements.
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distinct anticompetitive harm caused by the agency agreements. Kevin Murphy Dep. 9:22-
10:11; 15:12-17; 296:19-25.
263. Professor Murphy’s hypotheses also are belied by Amazon’s actions. Grandinetti Direct
¶¶ 16-18; Naggar Direct ¶¶ 5-6.
1. Features that Preceded the Apple Agency Agreements Cannot Possibly Have
Resulted from Those Agreements
264. While Defendants would like to claim that the Apple Agency Agreements caused the
advent of enhanced e-books, including e-books with audio and video features, Apple has
admitted that such e-books already were available in app form prior to the launch of the
iBookstore. Apple (Keith Moerer) Dep. 52:1-6; see also Penguin (Timothy McCall) Dep.
168:22-169:21.
265. Likewise, Apple has admitted that there were e-book apps that used color even “before
the launch of the Kindle,” Apple (Keith Moerer) Dep. 52:12-15, which itself predated the Apple
Agency Agreements by years.
266. Such preexisting features cannot have resulted from the Apple Agency Agreements.
2. Features that Appeared Long After the Apple Agency Agreements Did Not
Result from Those Agreements
267. Nor are innovations that occurred after the introduction of the iBookstore attributable to
the Apple Agency Agreements simply because of chronology. Defendants have identified two
such features they would claim as procompetitive benefits of the Apple Agency Agreements,
fixed layout and iBooks Author. Tellingly, though, Apple’s experts have undertaken no
empirical analysis to test for any causal link between the Apple Agency Agreements and those
features.
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geographic market is the United States, and that Apple and Publisher Defendants collectively
possess substantial market power in the relevant market.
A. E-books Are Different from Physical Books
273. E-books have several features that differentiate them substantially from traditional
physical books. An e-book is a digital copy of a title, and as such, reading one requires an
electronic device such as an e-reader, smartphone, tablet, or laptop or desktop computer. In
addition, although an e-reader is a physical object with size and weight, an e-book has no size or
weight. A large number of e-books can be loaded onto an e-reader with no incremental weight
or size. A consumer can travel with a large number of e-books, and the size and weight of those
books (including the device to read them) can be smaller and lighter than the aggregation of the
physical versions of the same titles. Grandinetti Direct ¶ 10; Gilbert Direct ¶ 200. These
differences, among others, may lead consumers of e-books to prefer the e-book format, so they
may be willing to accept a significant price increase without switching to the print book format.
Gilbert Direct ¶ 201.
B. Market Participants Observe Low Substitution from E-books to Physical Books
274. The demand for e-books is inelastic. In the weeks following the implementation of the
Apple Agency Agreements, average prices of the titles available from the first four Publisher
Defendants rose by 21.1%, while consumers purchased only 7.7% fewer of those publishers’
e-books. See Gilbert Direct ¶ 189. Because consumers reduced their purchases of Publisher
Defendants’ e-books by less (on a percentage basis) than the amount by which prices increased,
the price increase on Publisher Defendants’ e-books was profitable, which shows that the
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their e-books increased. Gilbert Direct ¶¶ 205-08 & Figure 7. Instead, physical book sales were
steady until the following Christmas season, when sales traditionally rise. Gilbert Direct at
Figure 7.
C. Individual Trade E-book Titles Are Not Separate Markets
278. No party claims that each e-book title is its own market. Apple admits that the product
market is no smaller than trade e-books. PX-0803 at 6. Penguin denies that trade e-books is a
relevant market, but suggests only that the market might be broader, “includ[ing] at least
physical books and all e-books.” PX-0799 at 4.
279. No Defendant expert has offered analysis to support a product market broader than trade
e-books.
D. The Relevant Geographic Market Is the United States
280. Apple admits that the relevant geographic market is the United States. PX-0803 at 6.
Penguin acknowledges that the geographic market is “no narrower than the United States,” and
asserts that there may be “some form of a more global market” for e-books. PX-0799 at 2-3.
281. The United States is a relevant geographic market because trade e-books sold in the
United States “would form a valuable monopoly.” Baker Direct ¶ 41. A U.S.-only geographic
market is consistent with the fact that e-book distribution rights are region-specific, making it
difficult for a U.S.-based consumer to substitute to e-books sold at retail outlets abroad. For
example, Amazon customers in the U.S. cannot purchase Kindle books from Amazon’s UK site
to read on their Kindles in the U.S. Id. & n.25.
282. That is, the United States is a relevant geographic market because when a hypothetical
monopolist of the relevant product, trade e-books, could discriminate on the basis of customer
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Dated: April 26, 2013
Respectfully submitted,
Mark W. RyanLawrence E. ButermanDaniel McCuaigMary Beth McGee Nina B. HaleUnited States Department of JusticeAntitrust Division
450 Fifth Street, NW, Suite 4000Washington, DC 20530(202) [email protected]
On Behalf of the United States of America
Gabriel GerveyEric LipmanDavid AshtonAssistant Attorneys GeneralOffice of the Attorney General of TexasP.O. Box 12548Austin, TX 78711(512) 463-1262
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UNITED STATES DISTRICT COURTFOR THE SOUTHERN DISTRICT OF NEW YORK
__________________________________________
)UNITED STATES OF AMERICA, ))
Plaintiff, ))
v. ) Civil Action No. 12-cv-2826 (DLC))
APPLE, INC., et al., ))
Defendants. ) __________________________________________)
__________________________________________ )
THE STATE OF TEXAS; )THE STATE OF CONNECTICUT; et al., )
)Plaintiffs, )
)v. ) Civil Action No. 12-cv-03394 (DLC)
)PENGUIN GROUP (USA) INC. et al., )
)Defendants. )
_________________________________________ )
PLAINTIFFS’ PROPOSED CONCLUSIONS OF LAW
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B. Full Rule of Reason Analysis Shows that the Conspiracy Harmed Competition ............. 26 1. Defendants’ conspiracy has had an adverse effect on competition .............................. 27
a. Defendants’ conspiracy had direct anticompetitive effects .................................... 27 b. Publisher Defendants collectively have market power and their conspiracy with
Apple is inherently anticompetitive ........................................................................ 28 i. Trade e-books is a relevant product market ...................................................... 29 ii. The relevant geographic market is the United States ....................................... 32
iii. Publisher Defendants have sufficient market share.......................................... 32
2. Apple and Penguin Cannot Justify the Harm they Caused………………………34 a. Targeting Amazon’s below-cost pricing is not a valid justification for
anticompetitive conduct .......................................................................................... 35 b. Defendants’ arguments about e-reader competition are neither relevant nor
factually supported .................................................................................................. 36 c. Apple’s and Penguin’s procompetitive justifications, even if believed, do not
outweigh the harm they caused ............................................................................... 37 V. THE COURT HAS BROAD REMEDIAL POWERS .......................................................... 39 VI. DEFENDANTS’ CONDUCT VIOLATES STATE LAWS AS ALLEGED IN COUNT IV
OF THE STATES’ COMPLAINT ........................................................................................ 42
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TABLE OF AUTHORITIES
Cases Ambook Enters. v. Time Inc., 612 F.2d 604 (2d Cir. 1979) ...................................................... 9, 16
Anderson News, LLC v. Am. Media, Inc. 680 F.3d 162 (2d Cir. 2012) .................................... 5, 17 Apex Oil Co. v. Dimauro, 822 F.2d 246 (2d Cir. 1987)........................................................ 7, 9, 21 Arizona v. Maricopa Cnty. Med. Soc’y, 457 U.S. 332 (1982) ........................................................ 2 Ark. Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d 98 (2d Cir. 2010) .................... 38 Bascom Food Prods. Corp. v. Reese Finer Foods, 715 F. Supp. 616 (D.N.J. 1989) ..................... 3 Board of Trade of City of Chicago v. United States, 246 U.S. 231 (1918) .................................. 24 Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979) ....................... 3 Brown Shoe Co. v. United States, 370 U.S. 294 (1962) ............................................................... 29Cal. Dental Ass’n v. FTC , 526 U.S. 756 (1999) ........................................................................... 25Capital Imaging Assocs., P.C. v. Mohawk Valley Med. Assocs., 996 F.2d 537 (2d Cir. 1993) .. 26,
27, 38Catalano, Inc. v. Target Sales, Inc., 446 U.S. 643 (1980) ............................................................ 37City of Tuscaloosa v. Harcros Chems., Inc., 158 F.3d 548 (11th Cir. 1998) ................................. 8Clarett v. Nat’l Football League, 306 F. Supp. 2d 379 (S.D.N.Y. 2004) ..................................... 38Clorox Co. v. Sterling Winthrop, Inc., 117 F.3d 50 (2d Cir. 1997) ........................................ 26, 38Cosmetic Gallery, Inc. v. Schoeneman Corp., 495 F.3d 46 (3d Cir. 2007) .................................... 5 Denny’s Marina, Inc. v. Renfro Prods., Inc., 8 F.3d 1217 (7th Cir. 1993) ................................... 10 Eastman Kodak Co. v. Image Tech. Servs., 504 U.S. 451(1992) ........................................... 28, 29 Emigra Group, LLC v. Fragomen, Del Rey, Bernsen & Loewy, LLP , 612 F. Supp. 2d 330
(S.D.N.Y. 2009) ........................................................................................................................ 29 Fashion Originators Guild of Am. v. FTC , 312 U.S. 457 (1941) ........................................... 34, 35 Fineman v. Armstrong World Indus., 980 F.2d 171 (3d Cir. 1992).................................. 10, 17, 21 Flash Elecs. v. Universal Music, 312 F. Supp. 2d 379 (E.D.N.Y. 2004) ..................................... 33 FTC v. Ind. Fed’n of Dentists, 476 U.S. 447 (1986) ............................................................... 27, 34 FTC v. Superior Court Trial Lawyers Ass’n, 493 U.S. 411 (1990) ................................................ 2 FTC v. Whole Foods Mkt., 548 F.3d 1028 (D.C. Cir. 2008) ........................................................ 31Gen. Glass Co. v. Globe Glass & Trim Co., No. 71 C 921, 1980 WL 1890 (N.D. Ill. June 26,
1980) ........................................................................................................................................... 4Geneva Pharms. Tech. Corp. v. Barr Labs. Inc., 386 F.3d 485 (2d Cir. 2004) ............................ 27Georgia v. Pa. R.R. Co., 324 U.S. 439 (1945) ................................................................................ 1Gordon v. Lewistown Hosp., 423 F.3d 184 (3d Cir. 2005) ........................................................... 25 Hawaii v. Standard Oil Co., 405 U.S. 251 (1972) .......................................................................... 1 Heerwagen v. Clear Channel Commc’ns., 435 F.3d 219 (2d Cir. 2007)...................................... 32 In re Brand Name Prescription Drugs Antitrust Litigation, 123 F.3d 599 (7th Cir. 1997) .... 15, 23 In re Currency Conversion Fee Antitrust Litig., 773 F. Supp. 2d 351 (S.D.N.Y. 2011) .......... 7, 13 In re Currency Conversion Fee Antitrust Litigation, 265 F. Supp. 2d 385 (S.D.N.Y. 2003) 11, 21 In re Elec. Books Antitrust Litig., 859 F. Supp. 2d 671 (S.D.N.Y. 2012) ................................ 4, 24 In re Ethylene Propylene Diene Monomer (EPDM) Antitrust Litig., 681 F. Supp. 2d 141 (D.
Conn. 2009)..................................................................................................................... 8, 13, 14 In re Flat Glass Antitrust Litig., 385 F.3d 350 (3d Cir. 2004).................................................. 7, 12 In re High Fructose Corn Syrup Antitrust Litig., 295 F.3d 651 (7th Cir. 2002) ................ 6, 13, 16 In re Ins. Brokerage Antitrust Litig., 618 F.3d 300 (3d Cir. 2010)........................................... 6, 29
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United States v. Visa U.S.A., Inc., 344 F.3d 229 (2d Cir. 2003) ............................................ passimUnited States v. W. T. Grant Co., 345 U.S. 629 (1953) ................................................................ 39United States. v. H&R Block, Inc., 833 F. Supp. 2d 36 (D.D.C. 2011) ............................ 29, 30, 31
Statutes § 407.010.4, Mo.Rev.Stat. ............................................................................................................ 42§ 407.020.1, Mo.Rev.Stat. ............................................................................................................ 4315 U.S.C. § 1 (2004) ................................................................................................................... 1, 215 U.S.C. § 26 ................................................................................................................................. 128 U.S.C. § 1367 ........................................................................................................................... 41M.G.L. c. 93A § 2 ......................................................................................................................... 43Utah Code § 76-10-918(2) ............................................................................................................ 43
Other Authorities Phillip E. Areeda & Herbert Hovenkamp, FUNDAMENTALS OF A NTITRUST LAW § 14.03b, at 14–
25 (4th ed. 2011) ....................................................................................................................... 22U.S. Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines § 4.1 (2010) …….29VI Phillip E. Areeda and Herbert Hovenkamp, A NTITRUST LAW ¶1415c (2d ed. 2003) ........ 11, 34XI Phillip E. Areeda & Herbert Hovenkamp, A NTITRUST LAW ¶ 1914c (3d ed. 2011) ......... 33, 37
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I. APPLE’S CONSPIRACY WITH PUBLISHER DEFENDANTS IS PER SE ILLEGAL
1. Section 1 of the Sherman Act outlaws “[e]very contract, combination . . . or conspiracy,
in restraint of trade or commerce among the several States.” 15 U.S.C. § 1 (2004). Section 16 of
the Clayton Act authorizes states to seek injunctive relief against every contract, combination in
the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several
States. 15 U.S.C. § 26 (2004). The unlawful restraint of trade in this case also gives rise to
Plaintiff States having standing as parens patriae on behalf of their citizens and each states’
general welfare and economies. See Hawaii v. Standard Oil Co., 405 U.S. 251, 259–61 (1972);
Georgia v. Pa. R.R. Co., 324 U.S. 439, 447 (1945).
2. To establish a conspiracy in violation of Section 1, the United States and Plaintiff States
(collectively “Plaintiffs”) must “present direct or circumstantial evidence that reasonably tends to
prove that the [defendants] and others had a conscious commitment to a common scheme,
designed to achieve an unlawful objective.” Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S.
752, 764 (1984) (citation omitted).
3. A preponderance of the evidence shows that Apple, Inc. (“Apple”) conspired and agreed
with Hachette Book Group, Inc., a subsidiary of Hachette Livre (“Hachette”), HarperCollins
Publishers L.L.C., a subsidiary of News Corporation (“HarperCollins”), Holtzbrinck Publishers,
LLC d/b/a Macmillan, a subsidiary of Verlagsgruppe Georg von Holtzbrinck GmbH
(“Macmillan”), The Penguin Group, a Division of Pearson plc and Penguin Group (USA), Inc.
(“Penguin”), and Simon & Schuster, Inc., and a subsidiary of CBS Corporation (“Simon &
Schuster”) (collectively “Publisher Defendants”) for the purpose and with the effect of raising
consumer e-book prices and restraining retail price competition, in violation of Section 1 of the
Sherman Act. 15 U.S.C. § 1.
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“horizontal restraints on competition are essential if the product is to be available at all,” Nat’l
Collegiate Athletic Ass’n v. Bd. of Regents (“ NCAA”), 468 U.S. 85, 101 (1984), or where a “joint
selling arrangement may be so efficient that it will increase sellers’ aggregate output and thus be
procompetitive,” id. at 103 (citations omitted), as was true in the Supreme Court’s decisions in
NCAA and Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979)
(finding that blanket licensing fees were not per se price-fixing because defendants “made a
market” for copyrighted music that did not exist previously). Neither of these circumstances
applies to the present case. See, e.g., Bascom Food Prods. Corp. v. Reese Finer Foods, 715 F.
Supp. 616, 631–32 (D.N.J. 1989) (distinguishing NCAA and Broadcast Music in applying per se
rule to restraints that did not create a new product and were not essential to the product’s
existence).
B. Plaintiffs Have Proved a Per Se Illegal Horizontal Price-Fixing Agreementwith Apple at the Center
8. Apple helped to organize, and was thus a member of, a conspiracy with Penguin and the
other Publisher Defendants. Because this conspiracy is fundamentally the product of a
horizontal agreement among Publisher Defendants to fix the retail price of e-books, it is illegal
per se. “A horizontal cartel among competing manufacturers or competing retailers that
decreases output or reduces competition in order to increase price is, and ought to be, per se
unlawful.” Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 893 (2007); United
States v. Gen. Motors Corp., 384 U.S. 127, 144–45 (1966) (finding group boycott agreement
among competing car dealers and their supplier to be a horizontal restraint subjecting all parties
to per se liability).
9. Apple’s vertical relationship with Penguin and other Publisher Defendants does not alter
the fundamentally horizontal nature of the conspiracy. Apple “help[ed] the suppliers to collude,
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agreement. In short, there is ample evidence that Apple was acting to “disadvantage . . . its
competitors,” and did so by supervising a horizontal agreement among Publisher Defendants.
Toys “R” Us, 221 F.3d at 936.
II. BOTH DIRECT EVIDENCE AND INFERENCES FROM CIRCUMSTANTIALEVIDENCE PROVE A HORIZONTAL CONSPIRACY AMONG PUBLISHERDEFENDANTS
12. Plaintiffs can prove the existence of a horizontal agreement among Publisher Defendants
through either “direct or circumstantial evidence that reasonably tends to prove . . . a conscious
commitment to a common scheme designed to achieve an unlawful objective.” Anderson News,
LLC v. Am. Media, Inc. 680 F.3d 162, 184 (2d Cir. 2012) (emphasis omitted) (quoting Monsanto,
465 U.S. at 764). Both direct evidence of an agreement and circumstantial evidence, from which
the Court can infer an agreement, exists in this case.
A. Direct Evidence Exists of an Agreement Among Publisher Defendants to Fixthe Retail Price of E-books Above Amazon’s $9.99 Prices
13. Direct evidence of a horizontal agreement “evince[s] with clarity a concert of illegal
action” among the conspiring parties. Cosmetic Gallery, Inc. v. Schoeneman Corp., 495 F.3d 46,
52 (3d Cir. 2007) (detailing types of direct evidence). “All evidence, including direct evidence,
can sometimes require a factfinder to draw inferences to reach a particular conclusion, though
perhaps on average circumstantial evidence requires a longer chain of inferences.” In re Publ’n
Paper Antitrust Litig., 690 F.3d 51, 63 (2d Cir. 2012) (citation omitted).
14. Here, there is persuasive direct evidence of a horizontal agreement among Publisher
Defendants to raise e-book prices and eliminate price competition among e-book retailers. For
example, just as in Toys “R” Us, each publisher agreed to Apple’s agency agreements on the
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Supp. 2d 351, 366 (S.D.N.Y. 2011); (2) actions against independent economic self-interest, see,
e.g., id .; (3) “evidence implying a traditional conspiracy,” including competitors seeking
assurances of common action, see, e.g., In re Flat Glass Antitrust Litig., 385 F.3d 350, 360 (3d
Cir. 2004) (quoting Petruzzi’s IGA Supermarkets, Inc. v Darling-Delaware Co., 998 F.2d 1224,
1244 (3d Cir. 1993)); and (4) abrupt, unanimous changes in longstanding business practices, see
Interstate Circuit, Inc. v. United States, 306 U.S. 208, 223 (1939).
16. An antitrust plaintiff asking a court to infer a horizontal agreement from circumstantial
evidence and plus factors must prove that the evidence “might tend to exclude the possibility of
independent parallel behavior.” Apex Oil Co. v. DiMauro, 822 F.2d 246, 254 (2d Cir. 1987).
5
17. Where, as here, the “conspiracy is economically sensible for the alleged conspirators to
undertake,” the “tends to exclude standard” is “more easily satisfied.” See In re Publ’n Paper ,
690 F.3d at 63 (citing In re Flat Glass Antitrust Litig., 385 F.3d 350, 358 (3d Cir. 2004)). It
made economic sense for Publisher Defendants to work together and with Apple to increase e-
book prices. Publisher Defendants despised Amazon’s $9.99 pricing but knew that no one
publisher could address the problem on its own. Thus, Publisher Defendants could only achieve
their goal by acting collusively to obtain their desired outcome.
6
1. The parallel conduct of Penguin and the other Publisher Defendants’conduct and the resulting anticompetitive effects corroborate thedirect evidence of conspiracy
18. Consciously parallel conduct occurs when defendants act similarly, know of each other’s
actions, and take that knowledge into account when making decisions. See Petruzzi’s, 998 F.2d
at 1242–44. “Parallel behavior of a sort anomalous in a competitive market is [] a symptom of
5 But this standard does “not apply at all” when, as is true here, a plaintiff has produced directevidence of an agreement to fix prices. In re Pub’n Paper Antitrust Litig., 690 F.3d at 63. See
infra ¶ 48.
6 PF, at ¶¶ 25, 45, 49-50.
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price fixing, though standing alone it is not proof of it.” In re Text Messaging Antitrust Litig.,
630 F.3d 622, 627 (7th Cir. 2010). Consciously parallel behavior may exist, for example, when
prices move in a parallel fashion and the alleged conspirators are aware of the movement of each
other’s prices. See City of Tuscaloosa v. Harcros Chems., Inc., 158 F.3d 548, 572 (11th Cir.
1998). Similar treatment of suppliers or customers—and awareness that similar treatment is
occurring—can also demonstrate conscious parallelism. See Petruzzi’s, 998 F.2d at 1243
(recognizing as parallel behavior buyers’ similar actions in refraining from competing for each
other’s accounts).
19.
Publisher Defendants’ parallel conduct corroborates the direct evidence that they engaged
in a horizontal price-fixing agreement. Publisher Defendants all increased the prices of e-book
versions of their hardcover new releases and New York Times bestsellers nearly simultaneously,
at the first opportunity after securing control of retail pricing from their retailers.7 For most of
their new releases and bestsellers, Publisher Defendants all raised e-book prices to the maximum
levels allowable under their Apple Agency Agreements.8
20. Publisher Defendants also acted in parallel when they simultaneously abandoned the
prevailing wholesale model for distribution of e-books and entered the Apple Agency
Agreements.
These similar price movements alone
are enough to show parallel conduct. See City of Tuscaloosa, 158 F.3d at 572; see also In re
Ethylene Propylene Diene Monomer (EPDM) Antitrust Litig., 681 F. Supp. 2d 141, 169 (D.
Conn. 2009) (finding defendants’ six lockstep price increases satisfy parallel conduct
requirement).
9
7 PF, at ¶¶ 217-224.
Their parallel conduct continued when they each proceeded to impose agency
8 PF, at ¶ 217.
9 PF, at ¶ 175.
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against self-interest, absent collusion, because “they would stand to lose some of their best
customers”).
4. Traditional conspiracy evidence supports an inference of horizontal
agreement among Publisher Defendants
27. “The most important evidence will generally be non-economic evidence that there was an
actual, manifest agreement not to compete.” In re Flat Glass, 385 F.3d at 361. That evidence
often involves “customary indications of traditional conspiracy” or “proof that the defendants got
together and exchanged assurances of common action or otherwise adopted a common plan.” Id .
In Flat Glass, the Third Circuit emphasized the importance of information exchanges between
conspirators that affected the conspirators’ decisions after information was exchanged. Id . at
369. In that case, information exchanges between competitors took place several weeks before
the collusive action on one occasion and nearly a month before collusive action on another
occasion. Id . at 364, 367. The Flat Glass court concluded “a finder of fact could reasonably
infer that the flat glass producers used the information to implement collusive price increases;
that is, ‘the exchanges of information had an impact on pricing decisions.’” Id . at 369 (citation
omitted). In the present case, the information exchanges between Publisher Defendants were
plentiful and directly tied to their decisions to join with each other in moving to higher prices
under the agency model with Apple.20 In some instances, executives of Publisher Defendants
“exchanged assurances of common action” about signing the Apple Agency Agreements,21
20 PF, at ¶¶ 95-102.
the
types of assurances courts have found to be evidence of traditional conspiracy. See, e.g., In re
Flat Glass, 385 F.3d at 361.
21 PF, at ¶ 166.
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increased weight of communications between conspirators’ executives who possess decision-
making authority). Publisher Defendants’ CEOs and other leading decision makers regularly
communicated with each other regarding their concerns about the e-books market.24
31. As in In re EPDM , 681 F. Supp. 2d at 174–76, the frequency, volume, and friendly nature
of communications over several years among executives of Publisher Defendants supports
inferring an illicit agreement. The inter-publisher communications were part of “a plethora of
emails, memoranda, and other inter-firm communications,” about competitive matters, ranging
from the very specific, such as decisions to delay releases of particular e-books and assurances
about negotiations with Apple, to the general, such as concerns about the future of the e-books
market. Id . at 174.
25
5. Publisher Defendants all abruptly changed longstanding businesspractices
32. A group of competitors’ abrupt, near simultaneous, and far-reaching changes in methods
of doing business can be suggestive of conspiracy. The Interstate Circuit Court explained the
role such moves can serve in inferring a conspiracy: “It taxes credulity to believe that the several
distributors would, in the circumstances, have accepted and put into operation with substantial
unanimity such far-reaching changes in their business methods without some understanding that
all were to join . . . .” Id . at 223; see also Toys “R” Us, 221 F.3d at 935 (“the manufacturers'
decision to stop dealing with the warehouse clubs [was] an abrupt shift from the past”).
33. Publisher Defendants’ actions are like those that “taxe[d] credulity” in Interstate Circuit .
The agency model was a radical departure from the longstanding business practice of the
publishing industry to sell all books under a wholesale model. Nonetheless, five of the six
24 PF, at ¶¶ 40-43, 48.
25 PF, at ¶¶ 43, 54, 166.
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largest publishers all agreed simultaneously to change their long-standing business model – for
one that was less profitable in the short-run – in the span of about a month.26
34. In sum, there is ample direct and circumstantial evidence to prove a horizontal price-
fixing agreement among Publisher Defendants to raise the retail price of e-books.
III. BOTH DIRECT AND CIRCUMSTANTIAL EVIDENCE PROVE THAT APPLEKNOWINGLY PARTICIPATED IN AND FACILITATED PUBLISHERDEFENDANTS’ HORIZONTAL AGREEMENT
35. “It is well established ” that a distributor’s “coordination of horizontal agreements in
restraint of trade at the next distribution level by entering into a series of identical vertical
agreements with multiple parties may subject all participants to antitrust liability.” Laumann v.
Nat’l Hockey League, No. 12 Civ. 1817, 2012 WL 6043225, at *9 (S.D.N.Y. Dec. 5, 2012)
(emphasis added) (citing Interstate Circuit , 306 U.S. at 226); see also Toys “R” Us, 221 F.3d at
930. The idea that a customer may help enforce a conspiracy among manufacturers, and be held
liable for doing so, “is nothing new.” In re Brand Name Prescription Drugs Antitrust Litig., 123
F.3d 599, 614 (7th Cir. 1997).
A. Apple’s Conduct Strongly Resembles Conduct Condemned in “Hub andSpoke” Conspiracy Cases
36. Apple’s conspiracy with Publisher Defendants mirrors the schemes that violated Section
1 in Interstate Circuit and Toys “R” Us. In both cases, manufacturers conspired with
distributors in order to blunt competition from rival discounters. In Interstate Circuit , two
retailers (movie theater chains) violated Section 1 by requiring movie distributors to agree to sell
subsequent-run films to discount theatres only if the distributors agreed to charge a minimum
admissions price. “The obvious result of such a joint action by the [movie distributors] was to
weaken the ability of the [competing discount theatres] to draw audiences away from Interstate
26 PF, at ¶¶ 141, 153-70.
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and Consolidated by offering substantially lower prices . . . .” Ambook , 612 F.2d at 613–14
(emphasis added). In Toys “R” Us, “a modern equivalent” of Interstate Circuit , the retailer
unlawfully conspired with its toy manufacturer-suppliers to reduce the price competition it faced
from discount toy sellers. 221 F.3d at 935. Here, Apple’s conspiracy with Publisher Defendants
weakened Amazon’s ability to win customers with lower prices.
B. There is Extensive Direct Evidence of Apple’s Knowing Participation andFacilitation of Publisher Defendants’ Horizontal Agreement
37. As was true with Publisher Defendants, Apple executives’ own statements and
admissions are direct evidence of its role in the conspiracy. In re High Fructose Corn Syrup,
295 F.3d at 662 (stating that “evidence tantamount to an acknowledgement of guilt” constitutes
direct evidence of participation in conspiracy). For example, Apple’s former CEO Steve Jobs
admitted to his biographer that Apple “told the publishers ‘We’ll go to the agency model, where
you set the price, and we get our 30%, and yes, the customer pays a little more, but that is what
you want anyway. But we also asked for a guarantee that if anybody else is selling the books
cheaper than we are, then we can sell them at the lower price too.’”27 Similarly, Apple’s
conspiracy with Publisher Defendants allowed Mr. Jobs to presciently predict, when asked at the
iPad’s launch about why customers would pay higher prices for e-book titles when Amazon
offered the same titles for less, that Apple would not have to compete with Amazon’s low prices:
“the prices will be the same.”28 The direct evidence also includes Apple’s Mr. Saul’s meeting
notes that HarperCollins proposed agency to Apple “to fix Amazon pricing,”29
27 PF, at ¶ 92.
and Mr. Cue’s
summary of his calls relaying that proposal to the CEOs of Macmillan, Simon & Schuster, and
28 PF, at ¶ 171.
29 PF, at ¶ 89.
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an agency contract, and telling Publisher Defendants that Apple was not interested in being a
low-cost provider. Interstate Circuit , 306 U.S. at 222.33 For example, Mr. Cue told Ms. Reidy
of Simon & Schuster that “new release e-books should be priced at $12.99” and that “the only
way” to get “some level of reasonable pricing” “is for the industry to go to the agency model.”34
40. Second, as Apple negotiated the Agency Agreements, it repeatedly assured Publisher
Defendants that they would be joined by, and receive materially the same deals as, their
competitors.
35 See United States v. Masonite Corp., 316 U.S. 265, 269–70 (1942) (finding
illegal “agency” agreements between a patent holder and a group of competing distributors of the
patent holders’ products where “[e]ach ‘agent’ knew . . . that [the patent holder] proposed to
make substantially identical agreements with the others”). For example, as Mr. Cue conveyed to
Mr. Jobs three days before Penguin signed its Apple Agency Agreement, Mr. Shanks “wants an
assurance that he is 1 of 4 before signing (not in the contract).”36 Mr. Shanks testified that Mr.
Cue assured him that three other publishers were going to participate in the iBookstore launch, 37
and indeed, telephone records show that before Penguin signed, Mr. Cue made four calls to Mr.
Shanks’s cell phone over January 22, 24, and 25.38 Similarly, in response to Simon & Schuster
CEO Carolyn Reidy’s contemporaneous request for “an update on your progress in herding us
cats,”39
33 PF, at ¶¶ 85, 105.
Mr. Cue appears to have provided her with the number and names of publishers with
whom Apple had agreed in principle. Mr. Cue admitted he told Publisher Defendants “from very
34
PF, at ¶ 110.35 PF, at ¶ 73.
36 PF, at ¶ 160.
37 Penguin (David Shanks) CID Dep., at 86:7–24, 88:18–22.
38 PF, at ¶¶ 161-62.
39 PF, at ¶ 147.
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necessary consequence of which, if carried out, is restraint of interstate commerce, is sufficient
to establish an unlawful conspiracy under the Sherman Act.” Id . (citations omitted). Publisher
Defendants and Apple knew that the consequences of their actions would be higher consumer e-
book prices.44
42. There are other factual similarities between Interstate Circuit and this case. For example,
after the theatres “present[ed] their demands to all [distributors],” 306 U.S. at 222,
“[c]onferences followed” between the theaters and “the representatives of the various
distributors.” Id . at 218. In this case, Apple followed its delivery of terms sheets with a series of
meetings with Publisher Defendants.
45
43. In United States v. Parke, Davis and Co., the Supreme Court condemned a drug
manufacturer’s passing of assurances between retailers that each would cease advertising the
manufacturer’s products at below-cost prices, if others did so as well. 362 U.S. 29, 46 (1960).
The manufacturer received one retailer’s “apparent willingness to cooperate” as “the lever to
gain [the] acquiescence” of other retailers in subsequent meetings. Mr. Cue, in his rounds of
meetings with Publisher Defendants, similarly used the acquiescence of some Publisher
Defendants to secure agreement from others.
Courts have found that “shuttle diplomacy,” as practiced
by Mr. Cue and other Apple executives when performed as a go-between among horizontal
competitors, contributed to evidence of a conspiracy sufficient to defeat summary judgment. See
In re Mid-Atlantic Toyota Antitrust Litig., 560 F. Supp. 760, 775 (D. Md. 1983).
46
44 PF, at ¶¶ 85, 106, 112, 131, 168-69.
45 PF, at ¶¶ 113, 118.
46 PF, at ¶¶ 154-165. Plaintiffs neither argue nor mean to suggest that, standing alone, Mr. Cue’sshuttling between negotiating partners and attempting to lure them in accepting his deal violatesthe Sherman Act. Like all the evidence in this case, this must be viewed in context of the entirerecord.
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conduct. Not only did the court use the word “tend,” but the context made clear that the Court was simply requiring sufficient evidence to allow a reasonable factfinder to infer that the conspiratorial explanation is more likely than not.
See id. (citing Phillip E. Areeda & Herbert Hovenkamp, FUNDAMENTALS OF A NTITRUST
LAW § 14.03b, at 14–25 (4th ed. 2011) (footnotes omitted) (emphasis added)). Judge
Posner also characterized as “absurd[ ]” the suggestion that an antitrust plaintiff must
“exclude all possibility” that the defendants conduct was unilateral rather than collusive,
because “[t]hat would imply that the plaintiff . . . must prove a violation . . . not by a
preponderance of the evidence, not even by proof beyond a reasonable doubt . . . , but to
a 100 percent certainty.” In re Brand Name Prescription Drugs, 186 F.3d at 787. In any
event, “the standards established in Matsushita do not apply at all” when, as is true here,
a plaintiff has produced direct evidence of an agreement to fix prices. See In re Publ’n
Paper Antitrust Litig., 690 F.3d at 63.
E. Apple’s Liability for Participation in the Conspiracy Does Not Depend on ItHaving Market Power
50. As a threshold matter, if the Court finds that the price-fixing conspiracy at the heart of
this case is illegal per se, there is no market power requirement. Toys “R” Us, 221 F.3d at 936;
see also Nw. Wholesale Stationers, Inc. v. Pac. Stationery & Printing Co., 472 U.S. 284, 294
(1985).
51. Moreover, because of the existing dynamics of the publishing industry, Apple’s
facilitation of Publisher Defendants’ horizontal agreement did not require Apple to have market
power. Apple was in a unique position because of its popular physical and electronic platforms,
such as the iPhone device and the iTunes store.49
49 PF, at ¶ 270.
Highlighting Apple’s uniqueness in an email
to Madeline Mcintosh considering Apple’s proposed agency deal, Matt Shatz of Random House
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characterized Apple as “probably the only retailer in the world that offers us a last chance to shift
the anchor away from $9.99 for any foreseeable future.”50 Mr. Jobs similarly told James
Murdoch of HarperCollins’s parent News Corp.: “Apple’s iTunes Store and App Store have over
120 million customers with credit cards on file and have downloaded over 12 billion products.
This is the type of online asset[] that will be required to scale the ebook business into something
that matters to the publishers.” This convinced the publishers that only Apple was capable of
assisting the publishers in achieving their goal of moving Amazon off of its $9.99 pricing.”51
52. In any event, courts examining the liability of actors at a different level of the market do
not require that the party accused of facilitating horizontal conspiracies possess market power.
See In re Elec. Books Antitrust Litig., 859 F. Supp. 2d at 690–91 (collecting cases).
IV. DEFENDANTS’ CONDUCT IS ILLEGAL UNDER THE RULE OF REASON
53. Even if the conspiracy between Apple and Publisher Defendants is not subject to per se
condemnation, Apple’s conduct should still be found to have violated section 1 under the “rule of
reason,” because Apple knowingly entered into a series of agreements with Publisher Defendants
that limited Apple’s rivals’ ability to compete on price and in so doing, harmed consumers by
increasing e-book prices. NCAA, 468 U.S. at 118. A rule of reason analysis, described originally
in Board of Trade of City of Chicago v. United States, 246 U.S. 231, 238 (1918), and reiterated
by the Supreme Court numerous times since, requires the factfinder to “weigh[] all of the
circumstances of a case in deciding whether a restrictive practice should be prohibited.” K.M.B.
Warehouse Distribs. v. Walker Mfg. Co., 61 F.3d 123, 127 (2d Cir. 1995) (citation omitted).
50 Id .
51 Id .
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burden, plaintiffs must then show that the same procompetitive effect could be achieved through
an alternative means that is less restrictive of competition. Id .
1. Defendants’ conspiracy has had an adverse effect on competition
60. There are “two independent means by which to satisfy the adverse-effect requirement.”
Tops Mkts., Inc. v. Quality Mkts., Inc., 142 F.3d 90, 96 (2d Cir 1998). First, the plaintiff may
offer “proof of actual detrimental effects.” Capital Imaging , 996 F.2d at 546 (quoting FTC v.
Ind. Fed’n of Dentists, 476 U.S. 447, 460–61 (1986)) (detailed market analysis and inquiry into
market power not required if actual effects shown); Geneva Pharms. Tech. Corp. v. Barr Labs.
Inc., 386 F.3d 485, 509 (2d Cir. 2004) (citing Capital Imaging , 996 F.2d at 560–61) (same).
Alternatively, “where the plaintiff is unable to demonstrate [] actual effects” it “must at least
establish that defendants possess the requisite market power and thus the capacity to inhibit
competition market-wide.” K.M.B. Warehouse Distribs., 61 F.3d at 129 (quoting Capital
Imaging , 996 F.2d at 546).
a. Defendants’ conspiracy had direct anticompetitive effects
61. “The use of anticompetitive effects to demonstrate market power . . . is not limited to
‘quick look’ . . . cases.” Todd , 275 F.3d at 207 (collecting cases). Proof of actual or likely
detrimental effects “obviate[s] the need for an inquiry into market power, which is but a
surrogate for detrimental effects.” Ind. Fed’n of Dentists, 476 U.S. at 460–61 (quotation
omitted); see also Todd , 275 F.3d at 206–07. Anticompetitive effects may be demonstrated
through likely increased prices, reduced output, or decreased quality. See Capital Imaging , 966
F.2d at 546; see also United States v. Visa U.S.A., Inc., 344 F.3d 229, 240 (2d Cir. 2003)
(affirming district court’s finding that defendants’ conduct “harm[ed] competition by reducing
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69. In defining the market, neither the plaintiff nor the court need spell out the precise “metes
and bounds” of the market. Times-Picayune Publ’g Co. v. United States, 345 U.S. 594, 611
(1953). This is especially true here, where Apple’s expert, Dr. Murphy, testified that “the
experts have pretty much agreed that what the exact contours of the market are aren’t critical to
the economic analysis.”62
70. Defendants’ references to possible substitutes for e-books do not compel a different
conclusion. When defining a relevant product market, the Supreme Court has cautioned that it
need not include every possible substitute: “For every product, substitutes exist. But a relevant
market cannot meaningfully encompass that infinite range. The circle must be drawn narrowly
to exclude any other product to which, within reasonable variations in price, only a limited
number of buyers will turn . . . .” Times-Picayune Publ’g Co, 345 U.S. at 612. Nor is it harmful
to plaintiffs’ proposed relevant product market that e-books may compete to some degree with
print books, or even other forms of entertainment. H&R Block , 833 F.Supp. 2d at 54 (noting
that, though two products “may compete at some level, this does not necessarily require that they
be included in the relevant product market for antitrust purposes”); United States v. Visa U.S.A.,
Inc., 163 F. Supp. 2d 322, 338 (S.D.N.Y. 2001) (excluding cash and checks from general
purpose credit card market even though the different methods of payment are often functional
substitutes). An e-book is a distinctive product, with distinctive pricing, and with many features
that differentiate it from traditional print books or other forms of entertainment. See FTC v.
Whole Foods Mkt., 548 F.3d 1028, 1037–38 (D.C. Cir. 2008) (opinion of Brown, J.) (noting that
a “product’s peculiar characteristics and uses” and “distinct prices” may distinguish a relevant
market).
62 Kevin Murphy Dep. 178:6–9.
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ii. The relevant geographic market is the United States
71. Apple does not dispute that the relevant geographic market is the United States.63
Penguin acknowledges that the geographic market is “no narrower than the United States,” and
asserts that there may be “some form of a more global market” for e-books.64
iii. Publisher Defendants have sufficient market share
It bases its
arguments on the fact that certain free e-books (as opposed to those sold pursuant to agency
agreements) are available worldwide, and on reports of isolated instances of U.S. consumers
purchasing e-books from foreign retailers. Plaintiff States’ expert, Dr. Baker, as well as the
documents and testimony elicited from the publishers and retailers, however, demonstrate that
Publisher Defendants have taken great pains to ensure that no such end-runs around territorial
restrictions can be accomplished by any but the relatively few technologically sophisticated
consumers capable of “beating the system.” There is no reason to deviate in this case from the
Second Circuit’s observation that the “relevant geographic market for goods sold nationwide is
often the entire United States.” Heerwagen v. Clear Channel Commc’ns., 435 F.3d 219, 228 (2d
Cir. 2007).
72. Prior to entering the Apple Agency Agreements, Publisher Defendants had a collective
market share of approximately half of trade e-books sales.65
63 See PX-0803, at 6.
Publisher Defendants’ collective
share exceeds that on which courts have found market power in other cases. See, e.g., Visa, 344
F.3d at 239–40 (defendants each had market power with 47% and 26% of the market,
respectively); Reazin v. Blue Cross & Blue Shield, Inc., 899 F.2d 951, 969 (10th Cir. 1990)
(Defendant had market power with market share between 45%–62%).
64 PX-0799, at 2-3.
65 PF, at ¶ 283.
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Guild of Am. v. FTC , 312 U.S. 457, 467–68 (1941) (upholding decision of lower court to refuse
to hear evidence that group boycott by fashion designers was justified by desire to protect against
“devastating evils growing” from piracy of original designs); Oreck Corp. v. Whirlpool Corp.,
579 F.2d 126, 138 (2d Cir. 1978) (finding illegal conspiracy not “saved by reference to the need
for preserving the collaborators’ profit margins”).
a. Targeting Amazon’s below-cost pricing is not a valid justification for anticompetitive conduct
77. Defendants’ claim that that they were merely putting a stop to below-cost—or even
predatory—pricing by Amazon is not a valid defense to a Sherman Act violation. While
“[r]uinous competition, financial disaster, evils of price cutting and the like appear throughout
our history as ostensible justifications for price-fixing,” the Supreme Court has cautioned that
“[t]he elimination of so-called competitive evils is no legal justification for [defendants’
anticompetitive conduct].” United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 221–22
(1940). “[S]ociety prefers that coerced parties seek the protection of public authorities rather
than help create a cartel.” See VI Areeda & Hovenkamp ¶ 1408c (2d ed. 2003). As such, “[t]he
Rule of Reason does not support a defense based on the assumption that competition itself is
unreasonable.” NCAA, 468 U.S. at 117. It is up to Congress to determine whether firms may
deviate from the normal antitrust laws that govern their conduct. United States v. Nat’l Lead
Co., 63 F. Supp. 513, 525–26 (S.D.N.Y. 1945). Defendants do not, because they cannot, point to
circumstances here that merit taking that role upon themselves.
78. Moreover, courts have repeatedly rejected economic vigilantism as an excuse for
unlawful conspiracies. See, e.g., Fashion Originators Guild of Am., 312 U.S. at 467–68 (finding
a desire to protect against “devastating evils growing” from piracy of original designs not a valid
justification for defendants’ group boycott); United States v. Giordano, 261 F.3d 1134, 1142–43
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(11th Cir. 2001) (rejecting defense that price-fixing agreement was procompetitive because it
was meant to terminate a ruinous price war); Law v. Nat’l Collegiate Athletic Ass’n, 902 F. Supp.
1394, 1405–06 (D. Kan. 1995) (finding “skyrocketing costs” not a justification for an agreement
fixing the maximum salaries of certain basketball coaches), aff’d , 134 F.3d 1010 (10th Cir.
1998); United States v. Apple, Inc., 889 F. Supp. 2d 623, 635–36, 642 (S.D.N.Y. 2012)
(“Amazon’s alleged free-riding in no way justifies subsidizing brick-and-mortar bookstores by
virtue of an e-books price-fixing conspiracy.” “[E]ven if Amazon was engaged in predatory
pricing, this is no excuse for unlawful price-fixing . . . . The familiar mantra regarding ‘two
wrongs’ would seem to offer guidance in these circumstances.”).
b. Defendants’ arguments about e-reader competition are neitherrelevant nor factually supported
79. Defendants repeatedly attempt to justify their conduct in the trade e-book market by
pointing to increased competition in the wholly separate e-reader market.68
80. Procompetitive justifications for anticompetitive conduct must apply to the same market
in which the restraint is found, not to some other market. See United States v. Topco Assoc.,
Inc., 405 U.S. 596, 610 (1972) (noting competition “cannot be foreclosed with respect to one
sector of the economy because certain private citizens or groups believe that such foreclosure
might promote greater competition in a more important sector of the economy”); United States v.
Phila. Nat’l Bank , 374 U.S. 321, 370 (1963) (finding that anticompetitive effects in one market
cannot be justified by procompetitive consequences in another); Law v. Nat’l Collegiate Athletic
Ass’n, 902 F. Supp. 1394, 1406 (D. Kan. 1995), aff’d , 134 F.3d 1010 (10th Cir. 1998). Apple
Apart from the utter
lack of evidence that agency and higher e-book prices caused increased device competition, this
argument fails as a matter of law.
68 See, e.g., PX-0374; Penguin Response to States’ Interrogatory No. 3.
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permit other e-book retailers to sell e-books through their apps to Apple devices without having
to pay an in-app commission. To limit disputes and to facilitate enforcement of this and other
provisions, the Court may require Apple to pay for a monitor to determine its compliance with
the provisions of any order. Additionally, as a prophylactic set of measures, the Court can
require that Apple (a) log all conversations with any other e-book retailers, such as Barnes &
Noble, Google, Amazon, or Sony, that relate to e-books, e-reader devices, or apps that sell e-
books; (b) log all conversations that include more than one publisher; (c) notify the Department
of Justice every quarter of any complaints it receives accusing it of an antitrust violation; and (d)
provide its executives with antitrust compliance training.
89. Penguin has agreed to certain injunctive relief as part of a consent judgment in the case
brought by the United States.71
71 Proposed Final Judgment in United States Case, ECF No. 162-1.
If Penguin is found liable on the States’ claims, the States
request that the Court enter an injunction against Penguin coterminous with that embodied in the
consent judgment and incorporating any additional injunctive relief the Court deems appropriate.
See New York v. Microsoft Corp., 209 F. Supp. 2d 132, 154–55 (D.D.C. 2002) (court may grant
additional injunctive relief in parens patriae action after United States’ enforcement action
resolved by consent).
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92. Pursuant to the laws of the Plaintiff States, their respective Attorneys General may bring
actions for injunctive relief and civil penalties in the name of the State for violations of their state
law counterparts to Section 1 of the Sherman Act and other related statutes.73
93. The activities of Penguin and Apple, including the production, sale and distribution of e-
books, were in the regular, continuous, and substantial flow of interstate trade and commerce,
and have had and continue to have a substantial effect upon interstate commerce. Penguin’s and
Apple’s activities also have had and continue to have a substantial effect upon the trade and
commerce within each of the Plaintiff States, including the restraint of such trade and
commerce.
74
94. No later than July 29, 2009, Penguin and the other conspiring publishers entered into an
illegal agreement to act collectively to raise the price of frontlist trade e-books. This illegal
73 See Ala. Code § 8-10-1; Alaska Unfair Trade Practices and Consumer Protection Act, AlaskaStat. § 45.50.578(b)(2); Uniform State Antitrust Act, Ariz. Rev. Stat. Ann. § 44-1407; ArkansasUnfair Practices Act, Ark. Code Ann. § 4-75-212; Colorado Antitrust Act of 1992, Col. Rev.
Stat. § 6-4-112; Connecticut Antitrust Act, Conn. Gen. Stat. Ann. § 35-38 and ConnecticutUnfair Trade Practices Act, Conn. Gen. Stat. Ann. §§ 42-110o, 42-110m; Delaware AntitrustAct, Del. Code Ann. tit. 6, § 2107; District of Columbia Antitrust Act, D.C. Code § 28-4507;Idaho Competition Act, Idaho Code Ann. § 48-108; Illinois Antitrust Act, 740 Ill. Comp. Stat.Ann. 10/7(4); Ind. Code Ann. §§ 24-1-1-5.2, 24-1-2-7; Iowa Competition Law, Iowa Code Ann.§ 553.13; Kansas Restraint of Trade Act, Kan. Stat. Ann. § 50-160; La. Rev. Stat. Ann. §§51:122; Maryland Antitrust Act, Md. Code Ann., Com. Law § 11-209(a)(4); MassachusettsConsumer Protection Act, Mass. Gen. Laws c. 93A; Michigan Antitrust Reform Act, Mich.Comp. Laws Ann. § 445.777; Missouri Antitrust Act, Mo. Rev. Stat. § 416.011 et seq., andMissouri Merchandising Practices Act, Mo. Rev. Stat.§ 407.010 et seq.; Neb. Rev. Stat. § 59-821, Uniform Deceptive Trade Practices Act, Neb. Rev. Stat. § 87-303.11; N.M. Stat. Ann. §§57-1-7, 57-12-11; N.Y. Gen. Bus. Law §§ 340–342-b, 369-a; Uniform State Antitrust Act, N.D.Cent. Code Ann. § 51-08-1-08; Ohio Rev. Code Ann. §§ 1331.03, 1331.08; 10 L.P.R.A. §§259(i), 266, 268; S.D. Codified Laws §§ 37-1-14.2; Tennessee Trade Practices Act, Tenn. CodeAnn. §§ 47-25-103, 47-25-106, Tennessee Consumer Protection Act, Tenn. Code Ann. § 47-18-122; Tex. Bus. & Com. Code Ann. § 15.20(a); Utah Antitrust Act, Utah Code Ann. § 76-10-918;Vt. Stat. Ann. tit. 9, §§ 2458 and 2465; Virginia Antitrust Act, Va. Code Ann. §§ 59.1-9.11,59.1-9.15; West Virginia Antitrust Act, W. Va. Code Ann. § 47-18-8; Wis. Stat. Ann. §§ 133.03.
74 PX-0793; PX-0792.
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agreement continued until at least December 18, 2012, when Penguin entered into a settlement
with the United States.
95. No later than January 25, 2010, Apple, Penguin, and the other Publisher Defendants,
entered into a conspiracy for the purpose and with the effect of raising e-books prices.75
96. Penguin’s and Apple’s violation of Section 1 of the Sherman Act and analogous state
laws was willful and flagrant and no fine or penalty has been imposed for the violation pursuant
to federal law.
This
illegal agreement continued until at least December 18, 2012, when Penguin entered into a
settlement with the United States.
97. E-books constitute merchandise pursuant to § 407.010.4, Mo.Rev.Stat., which defines
merchandise to include “any objects, wares, goods, commodities, intangibles, real estate or
services”.
98. The acts and practices of Penguin and Apple described above were in connection with
their sale or advertisement of e-Books and constituted deception, fraud, false pretense, false
promise, misrepresentation, unfair practice or the concealment, suppression, or omission of
material fact, and were, thus, unlawful practices in violation of § 407.020.1, Mo.Rev.Stat.
99. Penguin and Apple have not shown by a preponderance of the evidence that violations of
§ 407.020.1, Mo.Rev.Stat. resulted from bona fide errors notwithstanding their maintenance of
procedures reasonably adopted to avoid the errors.
100. Each sale of an e-book at an increased price as a result of the conspiracy is a separate
violation of the Utah Antitrust Act for purposes of Utah Code § 76-10-918(2).
75 PF, at ¶ 163.
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Dated: April 26, 2013
Respectfully submitted,
Mark W. RyanLawrence E. ButermanWilliam H. Jones IIDavid Z. Gringer United States Department of JusticeAntitrust Division450 Fifth Street, NW, Suite 4000Washington, DC 20530(202) 532-4753
On Behalf of the United States of America
Gabriel GerveyEric Lipman
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